EC4101 Week 02 Lecture 02 PDF

EC4101 Wk.02 Lec.02 Positive Economics: Studies objective or scientific explanations of how the economy works. Normative Economics: Offers recommendations based on personal value judgements. Model: Makes assumptions from which it deduces how people will behave. It is a deliberate simplification of...

EC4101 Wk.02 Lec.02 Positive Economics: Studies objective or scientific explanations of how the economy works. Normative Economics: Offers recommendations based on personal value judgements. Model: Makes assumptions from which it deduces how people will behave. It is a deliberate simplification of reality. Main Parts of an Economic Model: Description of individuals and variables Assumptions. A good model is one that makes accurate assumptions Outcomes: An outcome of a model is the equilibrium of the model, which creates hypotheses Data: Economic data are pieces of evidence about economic behaviour. Behavioural Law: A sensible theoretical relationship not rejected by evidence over a long period. Economic experiments can be laboratory experiments or field experiments. Index Number: Expresses data relative to a given base value. Index Number t = (Value at t / value in base year) x100 Consumer Price Index (CPI) Inflation: Measures the rate of growth of an index of consumer prices. Inflation Rate: The percentage increase in the average price of goods and services. Nominal Values: Are measured in the prices ruling at the time of measurement. Real Values: adjust nominal values for changes in the price level. Real/Relative Price = (Nominal Price / CPI) x100 Purchasing Power of Money: An index of the quantity of goods that can be bought for €1. % Change = (new value – old value) / old value (x100) Economic Growth: Refers to the increase in the capacity of an economy to produce goods and services over time. It is measured by the rate of increase of real GDP. Other Things Equal: A device for looking at the relationship between two variables, but remembering other variables also matter.  Correlation doesn’t imply causation Econometrics: Is the term used to refer to statistics to measure relationships in economic data. Economic Models: Production Possibility Frontier (PPF): Shows, for each output of one good, the maximum amount of the other good that can be produced. Points inside PPF are inefficient. The PPF illustrates efficiency, trade-offs opportunity cost and economic growth. Circular Flow Model: A visual model of the economy that shows how money flows through markets among households and firms. While overly simplistic, it gives a good general representation of how the main economic agents in an economy are connected. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: educba.com Image 2: corporatefinanceinstitute.com