1

Social Sciences Vs. Natural Sciences

• (A) Can economics be studied in a controlled laboratory setting?

• (B) Positive Vs. Normative Economics

2

Positive Vs. Normative Econ.

• Positive Economics

Statements of fact & logical deductions

Ex: If it rains the football field will get wet.

• Normative Economics

Statements about what should be (value judgments)

Example: The football field is better when it is wet.

3

• Economic Variable

An economic variable is an economic item of interest that can be defined and measured and takes on different possible values

Examples: Price, Population

4

Endogenous Vs. Exogenous Variables

Endogenous Variables

An endogenous variable is a variable that is explained by the theory. It is also called a dependent or response variable.

Exogenous Variable

An exogenous variable influences endogenous variables but is itself determined by factors outside the theory. It is also called an independent or causal variable.

5

Own Price $(Independent

variable)

Sales # of cans(Dependent

variable)

10 09 18 27 36 45 54 63 7

Plotting Pepsi Sales

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1011

0 1 2 3 4 5 6 7 8

Sales

Pric

e

6

Own PriceCompetitorsPrice

RelativeAdvertising

PepsiSales

7

Intercept:

y-intercept

y value when x=0

x-intercept:

x-value when y =0

Slope = Y Y

X X2 1

2 1

--

Plotting Pepsi Sales

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1011

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Sales

Pric

e

8

Equation of a straight line

y = m x+c

y= Vertical variable

x= Horizontal

Variable

m = Slope

c= y-intercept

Plotting Pepsi Sales

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SalesP

rice

9

Relationships between Endogenous & Exogenous Variables

Positive or Direct Relationship

The relationship between an Endogenous variable and an Exogenous variable is said to be positive or direct when an increase (or decrease) in the value of the exogenous variable leads to an increase (or decrease) in the value of the endogenous variable.

10

Relationships between Endogenous & Exogenous Variables

Negative or Inverse Relationship

The relationship between an Endogenous variable and an Exogenous variable is said to be negative or inverse when an increase (or decrease) in the value of the exogenous variable leads to a decrease (or an increase) in the value of the endogenous variable.

11

Relationships between Endogenous & Exogenous Variables

Unrelated Variables

Two variables are said to be unrelated when a change in the value of one variable does not affect the level of the other variable.

12

Movements along Vs. a Shift of the line

• A change in the exogenous variable represented on one of the axes results in a movement along the line.

• A change in an exogenous variable not represented on one of the axes results in a shift of the curve.

13

Own Price $(Independent

variable)

Sales # ofcans

(Dependentvariable)AD = A1

Sales # of cans(Dependent

variable)AD = A2

10 0 19 1 28 2 37 3 46 4 55 5 64 6 73 7 8

Movement ALong Vs. Shift of Line

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1011

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Sales

Pric

e

Sales (A1)

Sales (A2)