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ECON 101 Ch 2 notes.doc

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University of British Columbia
ECON 101
Robert Gateman

Positive and Normative Advice • Economists give 2 types of advice: normative + positive • Normative advice/statements: o advice that depends on a value judgement (tells others what they ought to do) o Cannot be evaluated solely by referring to facts o Statement about what ought to be as opposed to what actually is o Value judgements necessary to assess truth of statement • Positive advice: o “if this is what you want to do, here is a way to do it.” o Do not involve value judgements (assessment of what’s good/bad depending on one’s standards) o Statements about matters of fact (confident statement of fact/ strong belief) o Statement about what actually is as opposed to what ought to be // statement only about actual/ said-without-proof facts • Distinguishing what is actually true from what we want to be true requires distinguishing btwn positive + normative statements Economic theories • Theories: constructed to explain things o Variables: the basic element of any theory -> a well-defined item (price/quantity that can take on diff possible values) // any well-defined item that cam take on various specific values. 2 categories of variables:  Endogenous variable (dependent variable): value is determined w/I theory  Exogenous variable (independent variable): influences endogenous variable but is determined outside theory o Assumption: concerns motive, directions of causation, conditions under which the theory is meant to apply  Motives: individuals assumed to strive to maximize utility and firms assumed to try to maximize profits  Direction of causation: casual link that relates one variables to another • Economic model: used to illustrate idea to help organize thinking + gain crucial insights but not designed to generate testable prediction. Synonym for theory. Testing theories • A theory not useful when it can’t predict better than an alternative theory, therefore it will be either modified /replaced • The scientific approach = central to economics: Empirical observation leads to construction of theories, theories generate specific predictions + predictions tested by more empirical observation • New/ amended theory subjected first to logical analysis then to empirical testing. Cycle: 1. Definitions + assumptions about behavior 2. Process of logical deduction 3. Predictions 4. Empirical observation + testing of theory 5. Conclusion whether theory in conflict w/ evidence or it provides a better explanation of the facts than alternative competing theories • Important part of scientific approach consists of creating a theory that will explain some observation. A theory designed to explain observation X will generate a prediction about some other observable variables, Y+ Z. Prediction about Y + Z can be tested and may be rejected by data, then value of theory brought into question. • Economists must used uncontrolled experiments going on every day in marketplace o Marketplace cont
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