Social Sciences Vs.

Natural Sciences

(A) Can economics be studied in a

controlled laboratory setting?

(B) Positive Vs. Normative Economics

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 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. 2
 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

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 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. 4
 Own Price $ Sales # of cans Plotting Pepsi Sales
(Independent (Dependent
variable) variable) 11
10
10 0 9
8
9 1 7

Price
8 2 6
5
7 3 4
6 4 3
2
5 5 1
0
4 6 0 1 2 3 4 5 6 7 8
3 7 Sales

5
Own Price Relative
Competitors Advertising
Price

Pepsi
Sales

6
 Y2 - Y1
Slope = Plotting Pepsi Sales
X2 - X1
11
10
9
8
Intercept: 7

Price
6
5
y-intercept 4
3
y value when x=0 2
1
0
0 1 2 3 4 5 6 7 8
x-intercept: Sales

x-value when y =0
7
 Equation of a straight line
Plotting Pepsi Sales

y = m x+c 11
10
9
8
7

Price
6
y= Vertical variable 5
4
x= Horizontal 3
2
1
Variable 0
0 1 2 3 4 5 6 7 8

m = Slope Sales

c= y-intercept
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 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.

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 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.

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 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.

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 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.

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 Movement ALong Vs. Shift of Line
Own Price $ Sales # of Sales # of cans
(Independent cans (Dependent 11
variable) (Dependent variable) 10
variable) AD = A2 9
AD = A1 8 Sales (A2)
7
10 0 1

Price
6
Sales (A1)
9 1 2 5
4
8 2 3 3
7 3 4 2
1
6 4 5 0
5 5 6 0 1 2 3 4 5 6 7 8 9
4 6 7 Sales
3 7 8

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