Economics: Positive vs Normative Statements, Hypotheses, and Incentives

Flashcards covering economics basics, positive vs normative statements, hypotheses, and incentive concepts from the notes.

What is economics?

The social science that studies the choices individuals make in response to scarcity and the incentives that influence those choices.

What is a positive statement?

A statement that can be tested and is falsifiable with observable data; describes how the world is and cause-and-effect relationships.

Give an example of a positive statement.

There are 200 people in this room.

What is a hypothesis?

A testable relationship between two or more variables.

Provide an example of a hypothesis.

A zero-tolerance alcohol policy will reduce the number of students who choose to drink.

What is a normative statement?

A value judgment about costs and benefits describing what situation an individual prefers; inherently subjective.

Give an example of a normative statement.

We should have a zero-tolerance alcohol policy.

Under a zero-tolerance policy, who is more likely to get caught: a student who drinks one beer per day or a student who drinks four beers once a month?

The student who drinks one beer per day is more likely to be caught due to more frequent opportunities.

Which type of statements should we start with when thinking about policy: positive or normative?

Start with positive, scientific statements; once we know what is true about the world, we can move on to normative discussions.

What is an incentive in economics?

Anything that motivates or influences the choices of individuals.

What is scarcity?

The condition in which wants are greater than the limited resources available to satisfy them.

What is opportunity cost?

The value of the next best alternative that must be foregone when a choice is made.

Give an example of opportunity cost.

If you choose to study for an exam instead of going to a concert, the opportunity cost is the enjoyment and experience of the concert.

How does scarcity relate to opportunity cost?

Scarcity forces individuals and societies to make choices. Every time a choice is made, an alternative is given up, and that forgone alternative represents the opportunity cost of the chosen action.