How do Economists Work? Reading: Parkin (2014) Chapter 1 and Appendix

Understand the difference between a positive and a normative statement

Understand what an economic model isMake and interpret a scatter diagram Identify linear and non-linear

relationships and relationships that have a maximum and a minimum

Define and calculate the slope of a lineGraph relationships between more than

two variablesUnderstand the equation of a straight

line

What is - positive statements What ought to be – normative

statements Economists Discover Positive

Statements

An economic model is a description of interactions between economic variables. Most economic models are expressed mathematicallyMany are expressed with diagrams also.

Examples of Economic Models Demand/Supply Model(see notes) Let’s have a look at a few graphs, you will

understand these graphs later on in the course

AS/AD Model-(see notes) Let’s look at a few graphs of this model

Consumer Theory (see notes) Let’s have a look at some graphs of

consumer equilibrium

Economic Models range from fairly simple to very complex

The models covered on this course are fairly simple(relative to the others) but they are fundamental models in economics.

Economic Models have significant limitations however. Simplying assumptions(see notes about

this) Economics is not a perfect science

A model is tested by comparing its predictions with the facts.But testing an economic model is difficult, so economists also use:Natural experimentsStatistical investigationsEconomic experiments

There are two types of economists(in academia)

Theoretical Economists(see notes) Research Economists(see notes)

A scatter diagram plots the value of one variable on the x-axis and the value of another variable on the y-axis.A scatter diagram can make clear the relationship between two variables.

Graphs are used in economic models to view the relationship between variables.The patterns to look for in graphs are the four cases in which: Variables move in the same direction. Variables move in opposite directions. The relationship between two variables has a maximum or a minimum. Variables are unrelated.

Variables That Move in the Same DirectionThe relationship is a Positive relationship or a direct relationship.A line that slopes upward shows a positive relationship.A relationship shown by a straight line is called a linear relationship.The three graphs on the next slide show positive relationships.

Variables That Move in Opposite Directions

The relationship is a negative relationship or an inverse relationship.A line that slopes downward shows a negative relationship.The three graphs on the next slide show negative relationships.

Variables That Have a Maximum or a Minimum

The two graphs on the next slide show relationships that have a maximum and a minimum.

Variables That are UnrelatedSometimes, we want to emphasise that two variables are unrelated.

The slope of a relationship = y/x The slope of a straight line is constant If the relationship between two variables can

be explained using a straight line we say the relationship is linear.

The slope is positive if the line is upward sloping

The slope is negative if the line is downward sloping.

When a relationship involves more than two variables, we can plot the relationship between two of the variables by holding other variables constant – by using ceteris paribus.Ceteris ParibusCeteris paribus means ‘if all other relevant things remain the same’.

The table gives the quantity of ice cream consumed at different prices as the temperature varies.

To plot this relationship we hold the temperature at 20°C.At £1.20 a scoop, 10 litres are consumed.

We can also plot this relationship by holding the temperature constant at 25°C.At £1.20 a scoop, 17 litres are consumed.

When temperature is constant at 20°C and the price of ice cream changes, there is a movement along the blue curve.

When Other Things Change The temperature is held constant along each curve, but in reality the temperature can change.

The equation that describes the linear relationship between x and y is y=a+bx

a and b are fixed numbers(they are constant) a is the value of y when x=0 b is the slope of the line (constant for a linear

relationship)