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Download Lecture 1: ART OF THE ECONOMIC ARGUMENT
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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?
