2: Economic Theories, Data and Graphs

What is the key difference between a positive statement and a normative statement in economics?

A positive statement is fact-based, while a normative statement is opinion-based.

What must occur as changes happen in the PPB (Production Possibility Boundary) model?

The model must adapt and change.

What is an endogenous variable?

A variable whose value is determined within the theory and is usually on the y-axis as the dependent variable.

What distinguishes an exogenous variable?

An exogenous variable influences the endogenous variables but is determined outside of the theory, and is usually on the x-axis as the independent variable.

What do assumptions in a theory concern?

Assumptions concern motives, directions of causation, and the conditions where the theory is intended to apply.

What does direction of causation imply in economic theories?

It assumes one variable is related to another, suggesting a causal link between them.

What are hypotheses in the context of economic theories?

Hypotheses are propositions that can be deduced from a theory.

In the context of correlation vs causation, what does correlation indicate?

Correlation indicates that a pattern exists between two things.

What is the mean in economic data analysis?

The mean is the average calculated by sum/number.

What is the formula to calculate an index number?

[absolute value in a period] / [absolute value in base period] * 100.

How is the Consumer Price Index derived?

It is derived from the weighted average of separate price indexes, weighted relative to average importance to a consumer.

What type of data does cross-sectional data represent?

Cross-sectional data represents observations on one variable taken in different places at the same time.

What does a scatter diagram display?

A scatter diagram displays different variables on the x-axis and y-axis.

What is the purpose of the 45-degree line in a Cartesian plane?

The 45-degree line represents a 1:1 slope relationship.

What is the general formula for a linear function in economics?

y = b ± mx, where y is the endogenous variable and x is the exogenous variable.

What does opportunity cost represent in linear functions?

Opportunity cost represents the slope of the function.

What is the significance of marginal change in economics?

Marginal change refers to slight changes in the slope, indicating increasing or decreasing responses.

y-intercept

constant, autonomous value

x-coordinate

exogenous variable, independent variable

Slope

Induced component, propensity

Flashcard: A politician states, "The unemployment rate is 6%." Is this a positive or normative statement, and why?

This is a positive statement because it is fact-based and can be tested against data.

In a model where the price of a product (y-axis) is determined by supply and demand, and consumer income is a factor. How would you classify consumer income within this model, and why?

Consumer income would likely be an exogenous variable because it influences the price (an endogenous variable) but is determined outside the immediate price determination theory.

If a study shows that ice cream sales and shark attacks both increase in the summer months, does this mean ice cream causes shark attacks? Explain using economic concepts.

No, this is an example of correlation, not causation. Both are likely correlated with a third variable, such as warmer weather, which increases both ice cream consumption and swimming activity.

If the price of a specific good was 1.50 in the base period and is now 2.25, what is its current price index?

The index number is (2.25 / 1.50) * 100 = 1.5 * 100 = 150.

On a production possibility boundary (PPB) graph, if moving from point A to point B requires giving up 5 units of good X to gain 10 units of good Y, what is the opportunity cost of producing one unit of good Y, and how does this relate to the slope?

The opportunity cost of one unit of good Y is 5{X} / 10{Y} = 0.5 units of good X. This represents the absolute value of the slope of the PPB between points A and B.