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Chapter 2

ECO2013 Chapter Notes - Chapter 2: Exogeny, Opportunity Cost, Scientific Method

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Brandon Minster

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Chapter 2 Model Building and Gains from Trade
How do Economist Study the Economy?
o Economics is a social science that use the scientific method
Use economic models on specific relations of economics
Use simplified assumptions
The scientific methods in economics
o They use the scientific method to answer questions about observable phenomena
to explain how the world works.
o Steps:
1. Observe a phenomenon that interest them
2. From hypothesis, an explanation for observations.
3. Construct a model to test hypothesis
4. Design experiments to test model
5. Conclude with verifying, revising, or refuting hypothesis
o Typically gather historical evidence or real-world events rather than experiments.
Positive and Normative Analysis
o Economics approach objectively
Economist use positive analysis
o A positive statement can be tested and validated
Each statement can be thought of as a description of “what is”
Ex. “the unemployment rate is 7.0%
Because this statement can be tested by gathering data
o Normative statements cannot be tested or validated
“what ought to be” Theoretical or moral
o Economics approach situations with positive analysis
o Policy makers, voters, philosophers approach situations with normative
Economic Models
o A good model should be simple to understand, flexible in design, able to make
powerful predictions.
o Economic models provide the effect that changes in prices, production processes,
and government policies in real life behavior.
o Centeris Paribus
Centeris Paribus (Latin for Other things being equal): The process of
examining a change in one variable while holding everything else
o Economics start with simplified versions of reality
o Economics build models, change one variable at a time
Ask whether the change in a variable had a positive or a negative impact
Best known economic model is supply and demand
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