Transcript Lecture 1: ART OF THE ECONOMIC ARGUMENT

Lecture 1
Art of the Economic Argument
Methodology of Economics
• Definition of economic issue or question
– May or may not be refutable
– Normative question: Not refutable
• The income distribution of Norway is superior to
Canada
• Canada’s income distribution is inferior to USA
• What standard would you use to measure income
distribution? Mean, Medium, ?
• What is your prior ?
– More (less) unequal is (better) (worse)
Methodology of Economics
Continued
• Positive Economics
– Price increase always leads to a quantity
decrease
– Model: Consumer Utility maximization
• Axioms
– More is preferred to less
– If only two goods they must be substitutes
– A rise in income then the demand for one or both goods
must rise.
– No saving
Some Questions: Normative or
Positive ?
•
•
•
•
Is globalization Good?
Is child labour good?
Is Free Trade Good?
Appreciation of home currency reduces
exports
• Which of the above questions are
normative and why?
• How would you go about answering them?
Methodology of Economics
Continued
• Propositions
– U=F(X1, X2 …………..Xn)
– S.T. Y= P1 X1 +P2 X2 +…….Pn Xn
Deduction:
Given Axioms and Propositions:
Delta Q /Delta P <0
Or Demand curve is downward sloping.
Proof
• Use data and approriate statistical
technique
– Price of salmon fell from $5.00/kilo to
$1.00/kilo
– Estimate own price elasticity of demand
• -2.0
– How much quantity is consumed at $1.00 in
elasticity is =-2.0
– 10 times as much as at $5.00.
– Is this true?