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Unformatted text preview: Chapter Two Notes Normative Statement: A statement about what ought to be as opposed to what actually is; i.e. People should be encouraged to save. Positive Statement: A statement about what actually is (was or will be), as opposed to what ought to be; i.e. Raising interest rates encourages people to save. Distinguishing what is true from what we would like to be, or what we feel ought to be, requires distinguishing between positive and normative statements. Theories Theories are constructed to explain things. Any theory is distinguished by its variables, assumptions, and predictions Variables: Any well-defined item, such as the price or quantity of a commodity that can take on various specific values. Two broad categories of variables are important in any theory. Endogenous variable: A variable that is explained within a theory, sometimes called an induced variable or a dependent variable . Exogenous variable: A variable that is determined outside the theory, sometimes called an autonomous variable or an independent variable . I.e. The price of eggs and that quantity of eggs are endogenous variables in our theory of the egg market-our theory is designed to explain them. The state of the weather, however, is an exogenous variable. It may well affect the number of eggs consumers demand or producers supply but we can safely assume that the state of the weather is not influenced by the market for eggs. Assumptions: Concern motives, physical relations, directions of causation, and the conditions under which the theory is meant to apply. Motives: Assumption that everyone pursues his or her own self-interest when making economic decisions; people are assumed to know what they want, and to know how to go about getting it within the constraints set by the resources at their command. Physical Relations: If egg producers buy more chicks and use more labor, land, and chicken feed, they will probably produce more eggs. This is an example of one of the most important physical relations in economics. It concerns assumptions about how the amount of output is related to the quantities of factors of production used to...
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This note was uploaded on 04/07/2008 for the course ECON 206 taught by Professor Oertel during the Winter '08 term at Western Washington.
- Winter '08