Lecture 1

Art of the Economic Argument

Methodology of Economics

• Definition of economic issue or question– May or may not be refutable– Normative question: Not refutable

• The income distribution of Norway is superior to Canada

• Canada’s income distribution is inferior to USA• What standard would you use to measure income

distribution? Mean, Medium, ?• What is your prior ?

– More (less) unequal is (better) (worse)

Methodology of Economics Continued

• Positive Economics– Price increase always leads to a quantity

decrease– Model: Consumer Utility maximization

• Axioms– More is preferred to less– If only two goods they must be substitutes– A rise in income then the demand for one or both goods

must rise. – No saving

Some Questions: Normative or Positive ?

• Is globalization Good?

• Is child labour good?

• Is Free Trade Good?

• Appreciation of home currency reduces exports

• Which of the above questions are normative and why?

• How would you go about answering them?

Methodology of Economics Continued

• Propositions– U=F(X1, X2 …………..Xn)

– S.T. Y= P1 X1 +P2 X2 +…….Pn Xn

Deduction:

Given Axioms and Propositions:

Delta Q /Delta P <0

Or Demand curve is downward sloping.

Proof

• Use data and approriate statistical technique– Price of salmon fell from $5.00/kilo to

$1.00/kilo– Estimate own price elasticity of demand

• -2.0

– How much quantity is consumed at $1.00 in elasticity is =-2.0

– 10 times as much as at $5.00.– Is this true?