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### 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?

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