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Lecture 1

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

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Lecture 1

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  1. Lecture 1 Art of the Economic Argument

  2. 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)

  3. 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

  4. 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?

  5. 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.

  6. 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?

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