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Chapter 2

ECO100Y1 Chapter 2 Notes
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Department
Economics
Course
ECO101H1
Professor
Robert Gazzale
Semester
Fall

Description
ECO100Y1 Textbook Notes Chapter 2 2.1 Positive and Normative Advice  Normative Statement: a statement about what ought to be as opposed to what actually is. (depend on value judgements and cannot be evaluated solely by a recourse to facts)  Positive Statement: a statement about what actually is (was or will be), as opposed to what ought to be.  Distinguishing what is actually true from what we would like to be true requires distinguishing between positive and normative statements.  Economists must state clearly what part of the proffered advice is normative and what part is positive in public debates. 2.2 Economic Theories  Economists develop theories to explain economic events (i.e. many eggs sold and the price they are sold for on a given day in Manitoba).  Theories are distinguished by their: o Variables  Variable: any well-defined item, such as price or quantity of a commodity, that can take on various specific values.  Endogenous Variable: a variable that is explained within a theory (i.e. price of eggs and quantity of eggs). Sometimes called induced/dependent variable.  Exogenous Variable: a variable that is determined outside the theory (i.e. the state of the weather). Sometimes called autonomous/independent variable. o Assumptions  Assumptions concern:  Motives o This book makes the fundamental assumption that everyone pursues his or her own self- interest when making economic decisions. (i.e. consumer wants to maximize utility)  Direction of Causation o When economists assume two variables are related, they are usually assuming some causal link between the two. (i.e. chicken feed price lowers = greater supply of eggs)  Conditions of Application o Assumptions are often used to specify the conditions under which a theory is meant to hold (i.e. government absence, not literal, but when a lack of government input is present in a situation).  All theory is an abstraction from reality. If it were not, it would merely duplicate the world in all its complexity and would add little to our understanding of it. o Predictions  A theory’s predictions are the propositions that can be deduced from it (hypotheses).  Economic Model: used in two ways by economists, sometimes for an abstraction designed to illustrate some point but not designed to generate testable hypotheses, and sometimes as a synonym for theory.  Model: sometimes used by economists to refer to a specific quantitative version of a theory. (i.e. -10% in chicken feed cost = +8% in egg supply) 2.3 Testing Theories  A theory is tested by confronting its predictions with evidence.  The scientific approach is central to the study of economics: Empirical observation leads to t
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