EXAM 1 REVIEW - Economics o Social science o Study of how...

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Economics o Social science o Study of how people make decisions or choices when faced with scarcity o We use the scientific method Economists observe the world around them to try to figure out the “rules” for how the economy works They formulate theories (statements of these rules) then gather data to test their theories 1. We have a question we want to answer a. Usually questions regarding how customers respond to different factors (buying in bulk vs small quantities, packaging of product, etc) and understanding these factors will help make better production/sales decisions 2. We must engage in hypothesis and observation of the world around us a. Economists who want to understand how ppl make their buying decisions observe many different markets and products and watch how ppl respond to changes in the market, products and to their own circumstances. 3. We need to test our hypothesis a. Can mean setting up controlled experiments where we are able to control the inputs of the experiment and directly observe outcome i. Economists rarely these bc economic questions deal w/ decision making of people b. Most often must collect data from events we don’t control and look for statistical relationships to help us test our hypothesis i. Hard to find large group of ppl who would allow economists to increase/decrease their income in order to observe how they each change their spending habits ii. Hard to find producer who would allow economist to change product’s packaging and advertising to see if customers would buy more or less iii. These reasons are why economists often rely on data from natural experiments c. Natural experiment is most likely conducted
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i. Occurs when in everyday life something happens and we are able to collect data to allow us to compare people’s behavior both before and after the event; then determine if event caused any change in behavior ii. Also may rely on gov or private data sets which contain desired data [unemployed individuals ] 4. We may need to go back and revise our original hypothesis (based on results of our data and testing) a. Revise models to include additional rules b. Change in income is good example i. Normal goods: goods that people buy more of when the experience an increase in income (new cars) ii. Inferior goods: goods that people buy less of when they experience an increase in income (used cars) Economic Model o A collection or system of our well-established rules o Generally in mathematical form so that we can enter data and make a prediction of the outcome based on theses rules Harder to do in economics bc our rules are harder to put into equation form both bc our variables of interest are often harder to accurately measure and bc our models deal w/ decision-making processes of ppl and its impossible for us to determine everything that goes into the decision making process of the human brain o Designed to help us make better predictions so we can make better decisions Often include a large number of simplify assumptions in order to help us
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This note was uploaded on 09/14/2011 for the course ECON 1014 taught by Professor Ryan during the Spring '08 term at Missouri (Mizzou).

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EXAM 1 REVIEW - Economics o Social science o Study of how...

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