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Chapter 2

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McGill University
Economics (Arts)
ECON 208
Mayssun El- Attar Vilalta

Chapter 2 – Economic Theory, Data, and Graphs Sept.13.12 Positive and normative advice: - Normative statements - depend on value judgments and opinions - use of facts - subjective - i.e. unemployment is a more important social problem than inflation - Positive statements - do not involve value judgments - about what is, was, or will be - objective - can be tested - i.e. the majority of the population would prefer a policy that reduced unemployment to one that reduced inflation - Disagreement among economists: - failure to define their terms/points of reference clearly - stems from economists’ failure to acknowledge the full state of their own ignorance - public disagreement based on the positive/normative distinction - economists must differentiate normative advice from positive facts - laws requiring equal pay for work of equal value will make women better off - “better off” wages? Unemployment? Equality? Theories: - Constructed to explain things - i.e. what determines quantity/price of eggs bought and sold this month  use theory of demand and supply - theory consists of definitions about variables (endogenous, exogenous), assumptions (motives, causation, applicability), and a set of predictions/hypotheses market goods consumers producers market factors Models: - Used as a synonym for a theory - Applied to a specific quantitative formulation of a theory - As an illustrative abstraction which helps to organize our thoughts about a particular issue, not designed to generate testable hypotheses Testing theories: - Tested by confronting its predictions with evidence - Scientific approach: - empirical observation leads to construction of theories - theories generate specific predictions - the predictions are tested by more detailed empirical observation - Rejection vs. confirmat
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