ECO 405 Lecture Notes - Lecture 1: Indirect Approach, Demand Curve, Marginal Cost
Document Summary
Two general methods used to verify economic models: Shows that the model correctly predicts real-world events. Using the profit-maximization model to examine these approaches. A firm seeks to maximize profit under certain assumption. Focus on only a few forces at a time. Highlight the relationships between factors that affect the decisions of households and firms, and the results of those decisions. Values for exogenous variables are inputs into most economic models. Model outputs (results) are values for the endogenous variables: optimization assumption. Optimization models appear to perform fairly well in explaining reality: positive-normative distinction. Positive economic theories: seek to explain the economic phenomena that are observed. Normative economic theories: focus on what should be done. The economic theory of value and it"s historical evolution. The wealth of nations by adam smith is considered the beginning of modern economics. Finding a way to describe the relationship between value and price.
