Chapter 2 - Economic Theories, Data, and Graphs Flashcards
What are normative statements?
Our own judgment/statement, what we desire/wish
Give an example of a normative statement
The university should offer more majors in need with the industry
What are positive statements?
Based on facts, no judgments
Give an example of a positive statement
An effective way to reduce unemployment is to reduce unemployment insurance benefits
What is a theory?
Explains causes and effects, events that have happened or might happen
A theory consists of ,,_ (3)
Assumptions
Variables
Prediction
Why make assumptions?
To simplify the theory
Ex. assume people are logical, etc.
Give an example of an assumption - motive
Assume individuals are rational
Give an example of an assumption - direction of causation
Assume supply of wheat increases when weather improves
Give an example of an assumption - conditions of application
Assume no government or no trade
Are assumptions unrealistic?
Yes, because most countries have govt but it’s okay to simplify the theory
In the equation Y=f(X), which is exogenous, endogenous, independent, dependent?
Dependent=f(independent)
Endogenous=f(exogenous)
Give examples of exo and endo variables
Price and quantity = endogenous (output)
Weather = exogenous (input)
The amount of rainfall on the Canadian prairies determines the amount of wheat produced in Canada
Rainfall = exo Wheat = endo
When the world price of coffee increases, there is a change in the price of your cup of coffee at Tim Hortons
World price = exo
Price of cup = endo
If student loans were no longer available, there would be fewer students attending uni
Loans = exo Students = endo
An increase in the tax on gasoline leads people to drive more fuel-efficient vehicles
Tax increase = exo
More fuel efficient = endo
What is the difference between a linear function and a nonlinear function?
Linear: exponent is 1 (y=a+bx)
Nonlinear: exponent is more than 1
Give an example of a prediction
If OPEC members decide to reduce their oil production, oil price in the world will increase
When price increases, people demand _ and quantity _
Less, decreases
What is the main way to testing theories?
Scientific approach
What hypothesis does statistical analysis test?
If X increases, then Y will also increase
What is the difference between positive and negative correlation?
Positive: X and Y move together
Negative: X and Y move in opposite directions
How do you distinguish between correlation and causality?
Statistical tests
