ECON 2020 Lecture Notes - Lecture 2: Econometrics, Scientific Method, Ceteris Paribus

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5 Feb 2017

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Chapter 2
Thinking Like an Economist
I. What do economists do?
a. Two roles-
i. Scientists: try to explain the world
ii. Policy advisor: try to improve world
b. As scientists, we employ the scientific method
i. Observations- initial observation that sparks curiosity
ii. Theory- develop a theory or find existing that explains what they have
iii. Observation- test theory with data. Most economists use observational
data: results from decisions of individuals and interactions with market
1. Econometrics: the application of statistical tools to economic
c. Theoretical economics
i. Step 2 requires theory/theories
ii. Storyteller
iii. Essential drivers/mechanisms
d. Empirical economics
i. Step 3 requires to test our theories
ii. Experiments vs. observational data
II. Theoretical economists
a. All models have assumptions
i. Assumptions simplify the complex world, make it easier to understand
b. Model: a highly-simplified representation of a more complicated reality
c. Economists use model to study economic issues
III. Our first model
a. Circular-flow diagram: visual model of economy, shows how money flows
through markets among household/firms
b. Two actors
i. Household
ii. Firms
c. Two markets:
i. Goods/services
ii. Factors of production (land, labor, capital)
d. Revenue = price per quality (P*Q)
Two types of
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