Chapter 1 Macro

Chapter 1 Macro - Most economists believe that it is...

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Most economists believe that it is rational for people to try to anticipate the likely future consequences of one's behavior before choosing it—like driving with a suspended driver’s license or choosing to take up smoking. Actions have consequences—even inactions, which are choices not to do something or not to make changes, have consequences—failing to study for an exam. In mainstream economics, to say that people are rational is not to assume that they never make mistakes. It is merely to say that they do NOT make systematic mistakes. When economists talk of self-interest, they are not just referring to satisfaction of material wants but to a broader idea of “preferences” that can easily encompass the welfare of others. 1.3 Economic Theory Theories are statements or propositions used to explain and predict behavior in the real world. Because of the complexity of human behavior, economists must abstract to focus on the most important components of a particular problem. A hypothesis in economic theory is a testable prediction about how people will behave or react to a change in economic circumstances. For example, if the price of CDs increase, we can hypothesize that fewer CDs will be sold. Empirical analysis , the use of data to test hypotheses, is applied to determine whether a hypothesis fits well with the facts. If an economic hypothesis is supported by the data, we can tentatively accept as an economic theory. Virtually all theories in economics are expressed using a ceteris paribus (“holding everything else constant”) assumption. An example of ceteris paribus: The theory that if I study harder, I will perform better on a test must carefully hold other things constant. Economics, like the other social sciences, is concerned with reaching
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This note was uploaded on 04/22/2008 for the course ECE 101 taught by Professor Arnold during the Spring '08 term at Mississippi State.

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Chapter 1 Macro - Most economists believe that it is...

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