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© 2011  Steven Tschantz
Econometrics
Luke Froeb and Steven Tschantz
3/29/11
Problem
We imagine market price and quantity to be determined by a supply function, defining how much sellers would sell at any
given price, and a demand function, defining how much buyers would buy at any given price. But we don't directly observe
supply or demand functions, only the intersection where the quantity sellers supply matches the quantity buyers demand. We
observe variable market prices and quantities, but we don't know whether they change due to changes in supply, demand, or
both. How can we determine the average consumer demand, in particular the sensitivity of consumer demand to prices, when
the prices we observe are also varying with the consumer demand?
Model
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A formal definition of econometrics
Econometrics
From Wikipedia, the free encyclopedia
Econometrics is concerned with the tasks of developing and applying quantitative or statistical methods to the study and
elucidation of economic principles. Econometrics combines economic theory with statistics to analyze and test economic
relationships. Theoretical econometrics considers questions about the statistical properties of estimators and tests, while
applied econometrics is concerned with the application of econometric methods to assess economic theories. Although the
first known use of the term "econometrics" was by Pawe
Ciompa in 1910, Ragnar Frisch is given credit for coining the term in
the sense that it is used today.
Although many econometric methods represent applications of standard statistical models, there are some special features of
economic data that distinguish econometrics from other branches of statistics. Economic data are generally observational,
rather than being derived from controlled experiments. Because the individual units in an economy interact with each other,
the observed data tend to reflect complex economic equilibrium conditions rather than simple behavioral relationships based
on preferences or technology. Consequently, the field of econometrics has developed methods for identification and estima
tion of simultaneous equation models. These methods allow researchers to make causal inferences in the absence of con
trolled experiments.
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Discussion
This last point is critical. To illustrate it, consider the difference between what a statistician does and what an econometrician
does. For example, to determine the effects of a program on performance, a researcher randomly assign students to the
program (experimental group) or the alternative (control group). The statistician measures the effect of the program as the
difference between the performance of the two groups. To test whether the effect of the program is significantly different from
zero, the statistician might develop a test, e.g., testing whether the difference between the two means is statistically significant.
It is generally difficult and expensive to carry out realistic economic experiments. A consumer's response to a survey may not
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 Spring '11
 Schantz
 Math

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