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Example of Sunk CostConsider the cost of producing a book, say Michael Parkin's Macroeconomics. Assume that 15,000copies are produced. The total cost of producing the copies includes the cost of the authors' time in writing the book, the cost of editing, the cost of making the plates for printing, the cost of the paper and ink, and perhaps the cost of advertising. If the total cost amounts up to $900,000, then the average cost of one copy would be $60. Suppose a second printing is brought onto agenda. Should another 10,000 copies be produced? In deciding whether to proceed, the costs of writing, editing, making plates, and so forth are irrelevant in that they have already been incurred in the previous 15,000 copies. That is, they are sunk costs. 1.2.4. Positive vs. Normative The questions economics asks and attempts to answer fall into two categories. Positive economics is an assertion about economic reality that can be supported or rejected by reference to the facts. It is used to understand the behavior and operation of economic systems, rather than passing judgments on them. Normative economics reflects opinions and values, judging whether the outcomes are good or bad. Simply speaking, positive economics deal with what is while normative economics is concerned with what should be. Not so normative as arts nor so positive as science The peculiarity of economics derives itself from these two kinds of statements, normative statements and positive statements, distinguishing economic discipline from both art and science that are either normative or positive. Economics, on the other hand, is not so normative as art nor so positive as science. In fact, many economists confront one another on a number of economic topics such as what the proper role of government should be. 1.2.5. 4 Steps to Reach a Conclusion Theories or models are formal conclusions achieved or discovered through scientific procedures. In economic analysis and research though, it is not so "scientific". As in physical experiments, variables and factors can be controlled and manipulated very precisely, enabling you to anticipate almost everything. Economists, nevertheless, do research and perform experiments in a much more complex and unpredictable situation, trying to achieve conclusions primarily by observation. They are unable to control known variables in ways they want them to, not to mention those possibly missed out, scrambling the data or simply misleading them. What physicists discover can be formulated exactly in mathematics as they are in reality, and always correct; whereas things an economist discovers do not always hold true and some of them arouse dispute.
Anyway, to study economists problems, economists employ a process of theoretical investigation called the scientific method comprised of 4 steps:
If the answer to step 4 is negative, then either the hypothesis is incorrect or the previous two steps do not go smoothly; otherwise, hypothesis passes the validity test and a theory or model is confirmed. 1.3. From economic Theories to economic Policy 1.3.1. The Building of Theories and Models A model is a formal statement of a theory. No matter what discipline, be it physics, meteorology, astronomy or economics, researchers use models to explain the world, and models are built upon variables. A variable is a measure that can change from time to time or from observation to observation. Price is a variable, it differs from time to time. But why does it alter itself? No, it does not alter itself. That it hardly stay still is because other variables have impacts on it, either positive or negative, linear or nonlinear. The real world is so complex that we just cannot make out all the variables that govern it, but abstract some of them, to put together a model. In this sense, models are all simplifications, stripping away detail to expose only those that are important to the question being asked. An intuitive example of modeling is the charting of a map. Most maps are two-dimensional representations of a three-dimensional world, showing only things we are concerned about, omitting pretty much of the geographical details. Now we know what a variable is and why a model is different from the real world. But how exactly it is built? One of the techniques, or scientific methods, is the device of All Else Equal, or ceteris paribus. Very handy it is when we try to isolate the impact of one single factor upon something. What is the impact of a 10% rise in gasoline price on driving behaviors, ceteris paribus, or assuming that nothing else changes? We can tell that a reduction in driving occurs, but how much less, assuming no simultaneous change in other related things, income, number of children, population, laws and so forth? In a word, the concept helps us simplify reality in order to focus on the relationships that we are interested in. We can then delve into the relationship between just two variables by simply assuming that all else remain intact during any procedure. Economists literally find 3 means to represent a model or convey an economic idea, words, graphs, and equations. Pros and cons exist for each of them. Words convey simple ideas effectively, but not adequate for multi-variable models or two-variable model that is to show the mathematical nature of the quantitative relationship. Graphs do this job intuitively, and in a more specific as well as accurate way. It does not only give you the big picture, but also shows you what it is like at a specific point. Equations are not used as frequently as the former two, but presents us the underlying process, so more suitable for in-depth research and modeling. Below is a graph depicting the demand curve how Matthew responds to telephone price changes. Matthew's Telephone Call Demand Curve The relationship between price and quantity demanded presented graphically is called a demand curve. Demand curves have a negative slope, indicating a negative relationship between them. Lower prices cause quantity demanded to increase, and vice versa. 1.3.2. Economic Policy and 4 Criteria for Judging Theories and models are positive statements, helping us understand the mechanism of the world, but the formulation of economic policy requires a second step, the step to further these theories and models into practice to get to what we think it should be. What are the objectives? How to define better, that is what changes to our situation are positive? Do we better off or worse off? Four criteria are frequently applied in making these judgments:
Date: 2016-01-14; view: 750
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