Chapter 1 (2) Flashcards
PROBLEM-SOLVING TOOLBOX
► Accurately spotting the fundamental economic concepts at work in the world is sometimes difficult.
○ It's human nature to draw meaning from the patterns we observe around us, but our conclusions = not always correct.
Economic analysis requires:
► Theory to be combined with observations.
► Scrutiny of both theory and observations before drawing conclusions
These analyses distinguish between:
► Positive analysis: The way things are.
► Normative analysis: The way things should be.
Correlation & Causation
► When two events occur together, there is a tendency to assume that one causes the other.
Economists differentiate between two relationships:
- Correlation
- Uncorrelated
CORRELATION
a consistently-observed relationship between two events
Positive correlation
if both = tend to occur at the same time / move in the same direction; increase in A & B
Negative correlation
if one event = increases while a related event = decreases; increase in A and a decrease in B
UNCORRELATED
If there is no consistent relationship between two variables
CAUSATION
A relationship between two events in which one brings about the other
► A causes B
There are three reasons why an assumed causal relationship may be false:
► Correlation without causation
► Omitted variables
► Reverse causation
Correlation without causation
Two events may be extremely correlated, making it appear that a causal relationship exists; basically A does not cause B.
Omitted variables
Two events may be extremely correlated due to a third event causing the two
○ Each = has a casual relationship w/ a third factor rather than w/ each other
Reverse causation
Sometimes it is unclear whether Event A causes Event B or if Event B causes Event A.
○ When two events = always happen together -- > it can be hard to say which causes the other.
MODEL
Economic models show how people, firms, and governments make decisions about managing resources, and how their decisions interact
• a simplification of complex problems.
