Social Sciences Vs. Natural Sciences
• (A) Can economics be studied in a
controlled laboratory setting?
• (B) Positive Vs. Normative Economics
1
Positive Vs. Normative Econ.
• Positive Economics
Statements of fact & logical deductions
Ex: If it rains the football field will get wet.
• Normative Economics
Statements about what should be (value
judgments)
Example: The football field is better when it
is wet.
2
• Economic Variable
An economic variable is an economic item
of interest that can be defined and measured
and takes on different possible values
Examples: Price, Population
3
Endogenous Vs. Exogenous Variables
Endogenous Variables
An endogenous variable is a variable that is
explained by the theory. It is also called a
dependent or response variable.
Exogenous Variable
An exogenous variable influences
endogenous variables but is itself
determined by factors outside the theory. It
is also called an independent or causal
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variable.
Own Price $ Sales # of cans
(Independent (Dependent
variable)
variable)
0
1
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Price
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3
Plotting Pepsi Sales
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10
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1
0
0
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Sales
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Own Price
Competitors
Price
Relative
Advertising
Pepsi
Sales
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Y2 - Y1
Slope =
X2 - X1
Price
Intercept:
y-intercept
y value when x=0
Plotting Pepsi Sales
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10
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0
0
x-intercept:
x-value when y =0
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Sales
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Equation of a straight line
Plotting Pepsi Sales
y= Vertical variable
x= Horizontal
Variable
m = Slope
c= y-intercept
Price
y = m x+c
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10
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0
0
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Sales
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Relationships between Endogenous &
Exogenous Variables
Positive or Direct Relationship
The relationship between an Endogenous
variable and an Exogenous variable is said
to be positive or direct when an increase (or
decrease) in the value of the exogenous
variable leads to an increase (or decrease) in
the value of the endogenous variable.
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Relationships between Endogenous &
Exogenous Variables
Negative or Inverse Relationship
The relationship between an Endogenous
variable and an Exogenous variable is said
to be negative or inverse when an increase
(or decrease) in the value of the exogenous
variable leads to a decrease (or an increase)
in the value of the endogenous variable.
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Relationships between Endogenous &
Exogenous Variables
Unrelated Variables
Two variables are said to be unrelated when
a change in the value of one variable does
not affect the level of the other variable.
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Movements along Vs. a Shift of the line
• A change in the exogenous variable
represented on one of the axes results in a
movement along the line.
• A change in an exogenous variable not
represented on one of the axes results in a
shift of the curve.
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10
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Sales # of Sales # of cans
cans
(Dependent
(Dependent
variable)
variable)
AD = A2
AD = A1
0
1
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Price
Own Price $
(Independent
variable)
Movement ALong Vs. Shift of Line
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0
Sales (A2)
Sales (A1)
0
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Sales
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