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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
- 9. AS/AD Model-(see notes) Let’s look at a few graphs of this model
- 11. Consumer Theory (see notes) Let’s have a look at some graphs of consumer equilibrium
- 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.
- 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.
- 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.
- 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.
- 29. Variables That are Unrelated Sometimes, we want to emphasise that two variables are unrelated.
- 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
- 33. The slope is negative if the line is downward 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