Chapter 2 - Economic theories, data and graphs Flashcards
Positive statements
Statements that are based on fact
Ex: Raising interest rates encourages people to save
Ex: Increasing the price of cigarettes leads people to smoke less
Normative statements
Statements that have a value judgement, they try to explain what should be or what should happen.
Ex: People should be encouraged to save.
Ex: The government should raise the tax on cigarettes to discourage people from smoking.
Theories (models)
used to explain why things happened or why they might happen
Ex: using a model of demand and supply to analyze the effects of price and income on the equilibrium price of a commodity
Endogenous variable
affects the theory and is inside the theory
Ex: in the egg market, the price and qty of an egg may determine how many are sold and
Exogenous variables
Affects the theory indirectly and is outside the theory
Ex: In the egg market, the weather may influence how many eggs are purchased or sold but the egg market doesn’t affect the weather
What are the assumptions about a theory?
Motives
1) consumers are utility maximizers
2) producers are profit maximizers
Direction of Causation
1) What causes what?
Ex: When the weather gets better the supply of wheat grows, not the other way around
Conditions of application
1) sometimes some variables can be omitted. If we assumed the gov’t doesn’t exist, this simply means the gov’t has limited influence in the model
Index numbers
When economists want to compare two different industries over time, they don’t look at the raw data, they usually use Index Numbers. An index number will help analyze changes over time.
How do you build an index number?
By taking all the data in a table one by one and dividing it by the base year. Then multiply by 100 for data point number.
How do we compare index numbers with other index numbers?
Follow this formula:
(Index2 - index1)/index1
What is CPI?
CPI stands for consumer price index. It takes a weighted average of all the index numbers for all commodities (Fish, eggs, steel, fabric).
What is a cross-sectional graph?
When we analyze a variable at different places but at the same time period
What is a time series graph?
When analyzing one variable at different points in time
What is a scatter diagram?
It has an x and a y axis and can be a cross sectional or a time series graph
What is diminishing marginal response?
When the payoff diminishes as more is spent
What is marginal response?
The slope in a graph.
