ECONOMIC METHODOLOGY

• Define Microeconomic

  The study of individual markets (households and firms)
• Define Macroeconomic

  The study of an economy or group of economies
• Define Model

  A simplified view of reality used to explain economic problems and issues
• What is a Positive statement?

  Statements based on facts or actual evidence
• What is a Normative statement?

  Statement based on the economist's opinion or value judgement, which cannot be proven
• Define Ceteris paribus

  Latin phrase, meaning 'other things equal' or 'other things unchanged'; used by economists to model the effects of one change at a time
• Define Short run

  Time period when a firm can change one, but not all factor inputs
• Define Long run

  Time period when all factors of production are variable, but with a constant, such as state of technology
• Define Very long run

  Time period when all factors of production are variable
• Why Economics is a social science

  • Looks at human behaviour, in relation to satisfying human needs and wants
  • Theories are put forward and investigated, and has a hypothesis
• How economics works as a social science

  1. Define the problem to be investigated

  2. Put forward a theory

  3. Investigate the theory

  4. Accept or reject the theory
• What is a Positive statement?

  Based on facts and actual evidence
• Example of Positive statement

  • "The unemployment rate is 5%."
• Normative statement is based on?

  Based on personal opinion, usually relates to suggestions or recommendation
• Example of Normative statement

  • "The government should increase spending on education."
• Ceteris paribus

  • Assumes that apart form a single change of circumstance, everything else remains the same
  • Only considers one change and ignores the rest of potential changes
  • Usually for price changes
• What can change in the Short run?

  • Some factors of production, like labor and capital, are fixed and cannot be easily changed
  • Firms can adjust their output levels by changing the variable factors, like raw materials or labor hours, but cannot change production capacity
• What can change in the Long run?

  • All factors of production are variable
  • Firms have the flexibility to adjust their production capacity, technology, and other inputs to achieve their desired levels of output
• What can change in the Very long run?

  • All factors of production, including technology and even market structures, can potentially change
  • Shifts in consumer preferences, technological advancements, government regulations, and other macroeconomic factors