Chapter 2: Economic theories, data, and graphs

Question 1

Normative statements

Answer 1

A statement about what ought to be; it is based on a value judgement (opinion)

Question 2

Positive statement

Answer 2

A statement about what actually is, was, or will be; it is not based on a value judgement

Question 3

Economic theories

Answer 3

they try to explain economic phenomena, to interpret why and how the economy behaves and what is the best solution – how to influence or to solve the economic phenomena. They are a comprehensive system of assumptions, hypotheses, definitions and instructions on what should be done in a certain economic situation.

Question 4

Variable

Answer 4

Any well-defined item, such as the price or quantity of a commodity, that can take on various specific values

Question 5

Commodity

Answer 5

a tangible good that can be bought and sold or exchanged for products of similar value

Commodities are most often used as inputs in the production of other goods or services

Question 6

Endogenous variable

Answer 6

• Endogenous variables are variables in a statistical model that are changed or determined by their relationship with other variables.
• Endogenous variables are dependent variables, meaning they correlate with other factors—although it can be a positive or negative correlation.
• Endogenous variables are important in economic modelling because they show whether a variable causes a particular effect.

Question 7

Exogenous variables

Answer 7

exogenous variables are considered independent. In other words, one variable within the formula doesn’t dictate or directly correlate to a change in another. Exogenous variables have no direct or formulaic relationship. For example, personal income and colour preference, rainfall and gas prices, education obtained and favourite flower would all be considered exogenous factors.

Question 8

Assumptions

Answer 8

A theory’s assumption concerns motives, directions of causation, and the conditions under which the theory is meant to apply

Question 9

Motives

Answer 9

• Everyone pursues their own self-interest when making economic decisions
• Individuals are assumed to strive to maximise their utility
• firms are assumed to try to maximise their profits

Question 10

Direction of causation

Answer 10

Question 11

Condition of application

Answer 11

Question 12

Interaction between theory and empirical observation

Answer 12

Question 13

Statistical analysis

Answer 13

Question 14

Correlation

Answer 14

two or more variables follow the same path

data is consistent with a theory

Question 15

Causation

Answer 15

one variable affects the other

It Usually requires more advanced statistical techniques