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Chapter 2

Economics 101: Chapter 2

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ECON 101
Robert Gateman

Economics 101: Principles of Microeconomics Chapter 2 2.1 Positive and Normative Advice  Normative Advice: making judgements about the value of various things (valued judgement) o What others ought to do o Cannot be evaluated solely by a recourse of facts  Positive Advice: does not rely on a judgement about a value, instead is a stated fact o Do not need to be true, just have to be stated as a fact  Distinguishing what is actually true from what seems to be true is the difference between positive and normative statements Disagreements Among Economists:  Often many economists argue over unclear points rather than actual issues o Issues may need judgement, and economists must state the level of judgement they use  Economists have different views values that affect their separation of positive and normative o Must state in their arguments, what points they believe are positive and normative  Some issues are almost unanimously agreed upon by economists 2.2 Economic Theories  Economists use models to explain things that happen and to predict events in the future  Theories of demand and supply, are distinguishable by variables, assumptions, and predictions Variables:  A well defined item such as price or quantity, that may have different values  Endogenous Variable: value is determined within the theory  Exogenous Variable: influence the endogenous variable, determined outside of the theory Assumption:  Motives, direction of causation, and condition under which the theory is meant to be applied  Motives: everyone pursues their own self interest when making economical decisions o Individuals are assumed to maximize their utility, firms maximize profits o Assume households know what they want, and know how to get it  Direction of Causation: o Assume that one variable is related to another (casual link)  Conditions of Application: assumptions are used to specify conditions in the theory is meant to hold Economics 101: Principles of Microeconomics 2.3 Testing Theories Predictions:  Theories are testing by confronting its predictions with evidence  In some cases evidence may lead to faulty theories, and guesses may lead to useful theories  Empirical observation leads to the construction of theories (from observation or experiments) o Theories generate specific predictions, and predictions are tested by empirical observations Rejection versus Confirmation:  Theories generate to explain one thing, may be linked to other variables o If other variables are then tested, and rejected, the theory is questioned  Another method is to create a theory and then look for confirming evidence o Sometimes evidence is failed to be confirmed Statistical Analysis:  Theories can also be used to estimate numerical values of a function that describes a relationship o Also can be used to test whether a relationship exists, or the magnitude of it  Economists must use real life data, because they do not have controlled experiment data Correlation versus Causation:  X and Y may move to
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