Chapter 2: ECONOMIC METHODS AND ECONOMIC QUESTION

The Scientific Method/Empiricism

the name for the ongoing process that economist and other scientist use to:

1. Developing models that explain some part of the world 

2. Testing those models using the data to see how closely the model matches what we actually observe (evaluate those models by testing them with data)

Models

Simplified description or representation of the world/reality.

Theory

Economists refer to models as a ___. These terms are often used interchangeably

simple and useful

Important for model to be __ __ __ than it is for a a model to be

Hypotheses

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

Mean/Average

Sum of all the different values divided by the number of values 

Median

Calculated by ordering the number from least to greatest and then finding the value halfway through the list.

Power of Data

• Key strength of economic analysis is the amount of data used 

• Using lots of data - economists call them observations - strengthen the force of an empirical argument because the researcher can make more precise statements. 

Argument by anecdote

It is not enough to conclude something from a small sample of people

Causation

• When one thing directly affects another/direct relationship  

• direct cause & effect

• Ex. pulling an all nighter will make you tired

Correlation

• Mutual relationship between two things - as one thing changes, the changes as well 

• ex. ice cream sales & shark attack increase in summer

Positive correlation

• Implies that two variable tend to move in the same direction 

• ex. study more = good grades

Negative correlation

• Implies that the two variable tend to move in opposite directions

• spend money = less money you have

Zero correlation

• When the variables have movements that are not related, we that the variable have zero correlation/ no relationship with each other 

Omitted variables & Reverse causality

two main reasons we should not jump to the conclusion that a correlation between two variables implies a particular causal relationship:

Omitted variables

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

Reverse causality

when there is cause and effect but it goes in the opposite direction as what we thought (ex. Gambling and healthier older people) 

Experiments

• a controlled method of investigating causal relationships among variables 

• Purpose is to determine the impact of this variation 

Randomization

is the assignment of subjects by chance, rather than by choice, to a treatment group or to a control group.

Natural experiment

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

Important to our society

What is a good question for economics?

• We try to pursue research that has general implications for human behavior or economic performance.

Can be answered

What is a good question for economics?

• economists are primarily interested in questions that can be answered with enough hard work, careful reasoning,

  and empirical evidence.

Graph

graph summarizes a large amount of information as the saying goes, “a picture is worth a thousand words.”

Empirical evidence

facts that are obtained through observation and measurement.

Graph

A well-designed ——- summarizes a large amount of information—as

the saying goes, “a picture is worth a thousand words.”

Pie chart

is a circle split into slices of different sizes. The area of each slice represents the relative importance of non-overlapping parts that add up to the whole.

Bar chart

uses bars of different heights or lengths to indicate the properties of different groups.

Independent variable

is a variable whose value does not depend on another variable; in an experiment it is manipulated by the experimenter.

Dependent variable

is a variable whose value depends on another variable.

Time series graph

displays data at different points in time.