week 1 lecture b how do economists work
TRANSCRIPT
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How do Economists Work? Reading: Parkin (2014) Chapter 1 and Appendix
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Understand the difference between a positive and a normative statement
Understand what an economic model isMake and interpret a scatter diagram Identify linear and non-linear
relationships and relationships that have a maximum and a minimum
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Define and calculate the slope of a lineGraph relationships between more than
two variablesUnderstand the equation of a straight
line
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What is - positive statements What ought to be – normative
statements Economists Discover Positive
Statements
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An economic model is a description of interactions between economic variables. Most economic models are expressed mathematicallyMany are expressed with diagrams also.
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Examples of Economic Models Demand/Supply Model(see notes) Let’s have a look at a few graphs, you will
understand these graphs later on in the course
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AS/AD Model-(see notes) Let’s look at a few graphs of this model
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Consumer Theory (see notes) Let’s have a look at some graphs of
consumer equilibrium
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Economic Models range from fairly simple to very complex
The models covered on this course are fairly simple(relative to the others) but they are fundamental models in economics.
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Economic Models have significant limitations however. Simplying assumptions(see notes about
this) Economics is not a perfect science
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A model is tested by comparing its predictions with the facts.But testing an economic model is difficult, so economists also use:Natural experimentsStatistical investigationsEconomic experiments
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There are two types of economists(in academia)
Theoretical Economists(see notes) Research Economists(see notes)
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A scatter diagram plots the value of one variable on the x-axis and the value of another variable on the y-axis.A scatter diagram can make clear the relationship between two variables.
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Graphs are used in economic models to view the relationship between variables.The patterns to look for in graphs are the four cases in which: Variables move in the same direction. Variables move in opposite directions. The relationship between two variables has a maximum or a minimum. Variables are unrelated.
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Variables That Move in the Same DirectionThe relationship is a Positive relationship or a direct relationship.A line that slopes upward shows a positive relationship.A relationship shown by a straight line is called a linear relationship.The three graphs on the next slide show positive relationships.
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Variables That Move in Opposite Directions
The relationship is a negative relationship or an inverse relationship.A line that slopes downward shows a negative relationship.The three graphs on the next slide show negative relationships.
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Variables That Have a Maximum or a Minimum
The two graphs on the next slide show relationships that have a maximum and a minimum.
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Variables That are UnrelatedSometimes, we want to emphasise that two variables are unrelated.
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The slope of a relationship = y/x The slope of a straight line is constant If the relationship between two variables can
be explained using a straight line we say the relationship is linear.
The slope is positive if the line is upward sloping
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The slope is negative if the line is downward sloping.
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When a relationship involves more than two variables, we can plot the relationship between two of the variables by holding other variables constant – by using ceteris paribus.Ceteris ParibusCeteris paribus means ‘if all other relevant things remain the same’.
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The table gives the quantity of ice cream consumed at different prices as the temperature varies.
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To plot this relationship we hold the temperature at 20°C.At £1.20 a scoop, 10 litres are consumed.
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We can also plot this relationship by holding the temperature constant at 25°C.At £1.20 a scoop, 17 litres are consumed.
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When temperature is constant at 20°C and the price of ice cream changes, there is a movement along the blue curve.
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When Other Things Change The temperature is held constant along each curve, but in reality the temperature can change.
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The equation that describes the linear relationship between x and y is y=a+bx
a and b are fixed numbers(they are constant) a is the value of y when x=0 b is the slope of the line (constant for a linear
relationship)