Chapter 2: Economic Theories, Data, and Graphs
I. Positive and Normative Statements
Economists give two broad types of advice: normative and positive
- Normative: advice that depends on a value judgment + cannot be
evaluated solely by recourse to facts– tells others what they ought to
do
+ Value judgments are necessary to assess the truth of a normative
assessment
e.g: Government financial assistance to commercial banks is
ineffective at preventing job losses.
- Positive: do not involve value judgments. They are statements about
matters of fact – If this is what you want to do, here is a way to do it
+ The statement only about actual or alleged fact
+ Need not be true
+ The inclusion of a value judgment in a statement does not
necessarily make the statement itself normative
e.g: Government should not spend taxpayers’ money on supporting
commercial banks.
- Distinction: fundamental to scientific progress
1. Disagreements among economists
- Fail to define their terms or their points of reference clearly, and so
they end up “arguing past” each other
- Failure to acknowledge the full state of their ignorance
- positive/normative distinction.
II. Building and Testing Economic Theories
1. What are theories?
- Theories are constructed to explain things.
- Theories are distinguished by their variables, assumptions, and
predictions.
a. Variables
The basic elements of any theory
, Is a well-defined item (e.g: price/quantity) that can take on
different possible values
Two broad categories of variables:
+ An endogenous variable is one whose value is determined within
the theory
+ An exogenous variable influences the endogenous variables but
is itself determined outside the theory.
b. Assumptions
A theory’s assumptions concern:
Motives:
+ The economic theories we study make the fundamental
assumption that everyone pursues their own self-interest when
making economic decisions.
directions of causation
+ When economists assume that one variable is related to another,
they are usually assuming some causal link between the two.
e.g Consider a theory about the wheat market, for example. When the number of
wheat producers who want to supply is assumed to increase when the weather
improves, the causation runs from the weather to the wheat supply. Producers
supply more wheat because the growing conditions improve; they are not assumed
to experience better weather due to their increased wheat supply.
the conditions under which the theory is meant to apply/
Conditions of application
+ Assumptions are often used to specify the conditions under
which a theory is meant to hold.
e.g: For example, a theory that assumes there is “no government” usually does not
mean the absence of government but only that the theory is meant to apply when
governments are not significantly affecting the situation being studied.
Why are assumptions often unrealistic?
All theory is an abstraction from reality. If it were not, it would
merely duplicate the world in all its complexity and would add
I. Positive and Normative Statements
Economists give two broad types of advice: normative and positive
- Normative: advice that depends on a value judgment + cannot be
evaluated solely by recourse to facts– tells others what they ought to
do
+ Value judgments are necessary to assess the truth of a normative
assessment
e.g: Government financial assistance to commercial banks is
ineffective at preventing job losses.
- Positive: do not involve value judgments. They are statements about
matters of fact – If this is what you want to do, here is a way to do it
+ The statement only about actual or alleged fact
+ Need not be true
+ The inclusion of a value judgment in a statement does not
necessarily make the statement itself normative
e.g: Government should not spend taxpayers’ money on supporting
commercial banks.
- Distinction: fundamental to scientific progress
1. Disagreements among economists
- Fail to define their terms or their points of reference clearly, and so
they end up “arguing past” each other
- Failure to acknowledge the full state of their ignorance
- positive/normative distinction.
II. Building and Testing Economic Theories
1. What are theories?
- Theories are constructed to explain things.
- Theories are distinguished by their variables, assumptions, and
predictions.
a. Variables
The basic elements of any theory
, Is a well-defined item (e.g: price/quantity) that can take on
different possible values
Two broad categories of variables:
+ An endogenous variable is one whose value is determined within
the theory
+ An exogenous variable influences the endogenous variables but
is itself determined outside the theory.
b. Assumptions
A theory’s assumptions concern:
Motives:
+ The economic theories we study make the fundamental
assumption that everyone pursues their own self-interest when
making economic decisions.
directions of causation
+ When economists assume that one variable is related to another,
they are usually assuming some causal link between the two.
e.g Consider a theory about the wheat market, for example. When the number of
wheat producers who want to supply is assumed to increase when the weather
improves, the causation runs from the weather to the wheat supply. Producers
supply more wheat because the growing conditions improve; they are not assumed
to experience better weather due to their increased wheat supply.
the conditions under which the theory is meant to apply/
Conditions of application
+ Assumptions are often used to specify the conditions under
which a theory is meant to hold.
e.g: For example, a theory that assumes there is “no government” usually does not
mean the absence of government but only that the theory is meant to apply when
governments are not significantly affecting the situation being studied.
Why are assumptions often unrealistic?
All theory is an abstraction from reality. If it were not, it would
merely duplicate the world in all its complexity and would add
