chapter 2: economic methods and economic questions

the scientific method (empiricism) is composed of two steps:

• developing models that explain some part of the world

• testing those modules using data to see how closely the model matches what we actually observe

model

is a simplified data description of the reality

sometimes economists will refer to a model as a

theory

scientific models are used to make

predictions that can be checked with empirical

empirical evidence

consists of facts that are obtained through observation and measurement

empirical evidence is also called

data

hypothesis

are predictions (typically generated by a model) that be tested with data

to calculate wages

we generally have the possibility to use the mean or the median

the mean (the average)

is the sum of all the different values divided by the number of values

median value

is calculated by ordering the numbers from least to greatest and then finding the value half-way through the list

the scientific method refers to the process by which economists and other scientists

develop models of the world and test those models with data

a model’s predictions are referred as

hypotheses

causation

occurs when one thing directly affects another

variable

changing factors

correlation

two variables tend to change at the same time

example of correlation

a study from england showed that cows who were named gave more milk than unnamed cows

positive correlation

both variables change in the same direction (health over 65 increases; over 65 gambling increases)

negative correlation

both variables change in the opposite direction (level of education increases; unemployment rate decreases)

omitted variables

is something that has been left out of a study that, if included, would explain why two variables that are in the study are correlated

a correlation might not make sense until

the omitted variable is added

reverse causality

is when there is cause and effect, but it goes in the opposite direction as what we thought

controlled experiment

subjects are randomly put into treatment (something happens) and control (nothing happens) groups by the researcher

natural experiments

subjects end up in treatment or control groups due to something that is not purposefully determined by the researcher

which of the following is most likely to be an example of causation

a. the crime rate is high in a country. the literacy rate is high as well.

b. a student wins the money by scratching a ticket with a particular coin. he decides to scratch all tickets with the same coin in the future

c. a soccer player scored four goals when he wears red socks. he concludes that the red socks helped him score the goals

d. a firm producing compact fluorescent light bults installs new machinery. its per-day production of light bulbs increase

a firm producing compact fluorescent light bults installs new machinery. its per-day production of light bulbs increase

a correlation between two variables implies that

there is a mutual relationship between both variables

two properties of a good economic questions

1. relevant and important

economic research contributes to social welfare

2. can be answered

economic questions can be answered empirically