ARE 106 - ECONOMETRICS

Random Variable

A variable whose value is unknown until it is observed

It is not perfectly predictable beforehand

Single Die Random Variable Example

Before we roll a die, X is unknown, making it a random variable

After we roll a die, X is known and it is no longer a random variable

Expected Value

The expected value of a random variable is the average value that occurs in many repeated trials of the experiment

What two things makes up econometrics?

Economics, and measurement

Ceteris Parabus

We change 1 determinant and hold all others constant

What is included in an error term?

1) Factors that affect demand that are not in the model

2) Intrinsic uncertainty or economic activity

3) e is random

Is there an error term in the economic model?

No error term in the economic model

Is there an error term in the statistical model?

Yes there is an error term in the statistical model

Do we ever know the values of Beta 1 and Beta 2?

No we never know the true values of Beta 1 and Beta 2

Is x fixed?

Yes x is typically fixed while y varies

Why do we include error terms in our models?

1) Error term accounts for the influence of variables (information) not included in the model

2) Natural randomness of people

3) Data is not properly measured

Can we answer the question “How good are these estimates"? from our least squares estimator

No this question is not answerable because we will never know the true value of Beta 1 and Beta 2, so we would not know how good our estimates are

What is sampling variation?

The natural differences that occurs when we take multiple samples from the same population

What are the beginning steps of building a econometric model?

1) Pick factors that influence demand

2) Write the function with the factors on the right hand side (e.g, y=B1+B2Pb+B3Pc+B4Ps+B5Income)

3) Create analysis by looking at how demand changes when you one of the factors increases. Do it for all of the factors