Macroeconomics
c. A consumer’s decision to substitute a product with a cheaper one.
(Checkpoint answers are located at the end of the chapter under the review question answers.)
Economic Models The fundamental economic problem forcesalleconomiestoanswerthefollowing resourceallocation questions :
1. What to produce? 2. How to produce? 3. For whom to produce?
To deduce how individuals and entities can be incentivized to make choices that lead to the best possible outcomes forsociety,economistsbuildanduseformal models thatsimplifyrealityandmake simplifyingassumptions.Thishelpsthem predictoutcomes bothatindividualandcollectivelevels(i.e., howdifferenteconomicagentsanswerthe3abovequestions)andtherefore recommendpolicies that maximize effciency and utility . The Production Possibilities Curve, that will be explained later in this chapter, is an example of an economic model used by economists to construct generalizations. The Method of Economics: Positive vs. Normative Statements In economics, you will come across two types of economic statements and questions: positive and normative.
Positive statements describe what exists in an economy and how it works withoutmakinganyjudgments .Theyare objective andinvolve factsthatcan be tested . Example: The unemployment rate in 2022 is 2%.
This statement states a fact that can be verifed by looking at the data.
Normative statements , on the other hand, consist of opinions since they analyze economic behaviorand evaluatewhethertheyaregoodorbad .They may also suggest courses of action. Normative statements cannot be tested since they are subjective . Example: The government should cut taxes in half to increase disposable incomes. This statement expresses a value judgment that cannot be proven right or wrong. The key word in this statement is “should.” Whenever a statement in economics has terms such as “should” and “ought”, it can be classifed as normative.
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