20240429 Calibre April 2024 Investor Presentation.pdf
Week 1 lecture b how do economists work
1. How do Economists Work? Reading: Parkin (2014) Chapter 1
and Appendix
2. Understand the difference between a
positive and a normative statement
Understand what an economic model is
Make and interpret a scatter diagram
Identify linear and non-linear relationships
and relationships that have a maximum and
a minimum
3. Define and calculate the slope of a line
Graph relationships between more than two
variables
Understand the equation of a straight line
4. What is - positive statements
What ought to be – normative
statements
Economists Discover Positive Statements
5. An economic model is a description of
interactions between economic variables.
Most economic models are expressed
mathematically
Many are expressed with diagrams also.
6. 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
11. Consumer Theory (see notes)
Let’s have a look at some graphs of consumer
equilibrium
12.
13.
14. 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.
15. Economic Models have significant limitations
however.
Simplying assumptions(see notes about this)
Economics is not a perfect science
16. A model is tested by comparing its predictions with
the facts.
But testing an economic model is difficult, so
economists also use:
Natural experiments
Statistical investigations
Economic experiments
17. There are two types of economists(in
academia)
Theoretical Economists(see notes)
Research Economists(see notes)
18. 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.
19.
20.
21.
22. 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.
23. Variables That Move in the Same Direction
The 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.
24.
25. 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.
26.
27. Variables That Have a Maximum or a Minimum
The two graphs on the next slide show
relationships that have a maximum and a
minimum.
28.
29. Variables That are Unrelated
Sometimes, we want to emphasise that two
variables are unrelated.
30.
31. 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
36. 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 Paribus
Ceteris paribus means ‘if all other relevant
things remain the same’.
37. The table gives the quantity of ice cream consumed at
different prices as the temperature varies.
38. To plot this relationship we hold the temperature
at 20°C.
At £1.20 a scoop, 10 litres are consumed.
39. We can also plot this relationship by holding
the temperature constant at 25°C.
At £1.20 a scoop, 17 litres are consumed.
40. When temperature is constant at 20°C and
the price of ice cream changes, there is a
movement along the blue curve.
41. When Other Things Change
The temperature is held constant along each
curve, but in reality the temperature can change.
42. 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)
Editor's Notes
Models can be used to describe the processes behind changes in economic variables
Demand/Supply Model- explains why prices and quantities of goods sold in the market change over time.
AS/AD Model- explains changes in total output produced in the whole economy and changes in the average price level
Consumer Theory –explains how a consumer maximises his/her utility subject to his or her constraints
These models are an essential building block for more advanced study in economics.
An example of simplifying assumptions would be to assume that there are only 2 goods that a consumer could consume. An economist may do this in order to create a model of how the consumer maximises utility subject to his or her restraints. This is of course, quite an unrealistic assumption. However, the basic mechanism at play when we make our consumption decision may still be captured by the model i.e the model may still be able to describe an important process that occurs.
Economics is not a perfect science and economic models vary in their ability to describe what happens in the real world.
So the important thing is to understand how the models works and be able to use the models to explain real life events where appropriate.
Develop models of economic behaviour
Test the economic models to determine whether they provide an accurate description of the relationship between economic variables in reality.
Research empirical relationships between economic variables that have not been modelled.
Figure A1.3 (on the next slide) shows some data on box office tickets sold and the number of DVDs sold for nine of the most popular movies in 2011.
The table gives the data and the graph describes the relationship between box office tickets sold and DVD sales.
Figure A1.4(a) is a scatter diagram of income and expenditure, on average, during the period 2000 to 2011.
The red dot shows that in 2008, income was £14,700 and expenditure was £14,900.
The graph shows that as income increases, so does expenditure, and the relationship is a close one.
Figure A1.4(b) is a scatter diagram of inflation and unemployment in the UK over the period 2000 to 2011.
The points show that there is no relationship between the two variables.
These relationships are positive over part of their range and negative over the other part.
An example of a relationship with a maximum in economics- the laffer Curve
An example of a relationship with a minimum in economics- Average Cost Curve
The two graphs on the next slide show examples of variables that are unrelated.
Constant means it doesn’t change.
Slope is often denoted as m. M = ∆Y/∆X
Slope at a Point
The slope of a curved line at a point is equal to the slope of a straight line that is the tangent to that point.
Here, we calculate the slope of the curve at point A.
Remember, when a curve is tangential to a line, the slopes are equal.
Slope Across an Arc
The average slope of a curved line across an arc is equal to the slope of a straight line that joins the endpoints of the arc.
Here, we calculate the average slope of the curve along the arc BC.
This slope is an estimate of the slope at the mid-point, point A.
Arc = segment of a circle