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revenue$costnotes-1 - ECONOMICS 200 LECTURE NOTES(copyright...

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1 ECONOMICS 200 LECTURE NOTES (copyright 1997-2008 Mark Stegeman) We will use these notes in place of a text. They are less polished than a text, but I hope they are helpful. The text refers to colors in the graphs, but your graphs may be in grayscale. Chapter 1: Thinking Like an Economist. Most microeconomics textbooks have one to three chapters of introductory material, which can be depressingly long. Usually these chapters are designed to (i) motivate you to study economics, (ii) give you background information about the field, and (iii) teach you lots of terminology and general concepts. I prefer to introduce most of the terms and concepts as we go along, but it does make sense to provide some (brief) background. That is the purpose of this first chapter of the notes. The questions of economics. Economics is mainly concerned with the material organization of society. Economists want to understand what gets produced, how it gets produced, how wealth is distributed, prices, business cycles, economic growth, etc. But economics goes beyond material issues. Economists use their analytical tools to study more general questions of individual behavior and social organization, such as political processes and the evolution of culture. A. Economics as science. The scientific aspect of economics. Like all scientists, economists try to develop theories that generate testable predictions. For instance, a theory about prices may predict which circumstances cause prices to rise. To test the predictions, economists do empirical studies, which use data from the real world. If the predictions are frequently wrong, then (we hope that) the economists try to improve the theory. The process of making predictions, testing the predictions empirically, and refining theories in response to the empirical results, is loosely called the scientific method . Making predictions is an essential part of science, and prediction is what makes science useful. An example: The theory of biological evolution predicts that colonies of fruit flies exposed to certain kinds to adverse environmental conditions will, over many generations, develop a tolerance for those conditions. It may also predict that fossils of certain kinds will be found in certain locations and not others. Such predictions, and the process of testing and refining those predictions, mean that evolutionary theory is a science.
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2 The difficulty of assessing causality. One obstacle to developing good economic theories is the difficulty of determining whether A causes B, or B causes A, when events A and B seem to be related. Weak scientific researchers often make fundamental errors concerning causality, and even good researchers can find these issues perplexing. An example: Data indicate that women who earn higher hourly wages also tend to have lower fertility (i.e., fewer babies). This raises an important policy question. Since we expect female wages to continue rising, should we also expect fertility to continue falling? This
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revenue$costnotes-1 - ECONOMICS 200 LECTURE NOTES(copyright...

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