Chapter 2 Part 1:
Normative: one that really is a matter of opinion, maybe a matter of ethics, something that
someone thinks is how the world should be
Postivie statements: Are statements that include facts
Endogenous Variable: Also known as the dependant variable
Exogenous: Independent variable
Part 2
Assumptions:
Motives: Individuals consumers are assumed to strive to maximize their utility, while
producers are assumed to maximize their profits
Direction of causation: When economists assume that one variable is related to another,
they are usually assuming some causal link between the two.
Conditions of Aplication: Assumptions are often used to specify the conditions under which a
theory is meant to hold. For example, a theory that assumes there is “no government”
usually does not mean literally the absence of government but only that the theory is meant
to apply when governments are not significantly affecting the situation being studied.
Predictions: are the propositions that can be deduced from a theory. For example, a
prediction from a theory of the global oil market is that a rise in the world price for oil will lead
Canadian oil producers to produce and supply more oil.
-Most economic predictions involve causality. Economists must take care when testing
predictions to distinguish between correlation and causation. Correlation can establish that
the data are consistent with the theory; establishing causation usually requires more
advanced statistical techniques.
Part 3
Collecting data: Economists use real life observations. The advantage is that economists do
not need to spend much of their scarce research time collecting the data they use. The
disadvantage is that they are often not as well informed about the limitations of the data
collected by others as they would be if they had collected the data themselves.
Index numbers: Economists frequently look at data on prices or quantities and explore how
specific variables change over time. Comparing the time paths of two data series is difficult
when absolute numbers are used.
How to build an index number: Index numbers are calculated by dividing the value in the
given year by the value in the base year and multiplying the result by 100.
Cross sectional data: which means a number of different observations on one variable all
taken in different places at the same point in time.
Timed Series data: It refers to observations of one variable at successive points in time
Scatter Diagram: It is designed to show the relation between two different variables
Dimishing Marginal: There is always a payoff to more expenditure over the range shown in
the figure, but the payoff diminishes as more is spent.
Marginal Cost:
-refers to increase or decrease in the cost of producing one more unit or serving one more
customer.
-Marginal costs typically increase as annual output rises.
-Profits rise and then eventually fall as output rises.
-At either a minimum or a maximum of a function, the slope of the curve is zero. Therefore,
at the minimum or maximum the marginal response of Y to a change in X is zero.
-The principle of increasing marginal opportunity cost states that the more resources
devoted to any activity, the smaller the payoff from devoting additional resources to that
activity.
Area of rectangle: Base x Height
Area of triangle (½ x Base x Height)