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METHODOLOGY OF ECONOMICS

by Solomon Yoyo
November 9, 2020
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Methodology of economics, Methodology are principles that helps to analys the study of economics. It helps us to analys, interpret and explain the study/discipline of economics. Methodology of economics can also be known as methodology of science because economics is a social science.
(Science is an organised body of knowledge)

Things that are mostly done in economics

  • Make assumption
  • Observation of events
  • Collection of data on observed events
  • Interpreting and analysing economic data
  • Inspection of data against any irregularity
  • Testing of hypotheses.

 

INDUCTIVE REASONING :: This is the process of observation from which patterns might be formed. Which provide evidence to hypotheses which may lead to theory.

DEDUCTIVE REASONING:: This begins with a theory from which an hypotheses is drawn.

HYPOTHESES

HYPOTHESES : these are general statements that are yet to be confirmed to be either true or false.
There are three types of hypotheses
  1. Null hypotheses
  2. Alternative hypotheses
  3. Statistical hypotheses.
Null hypotheses:: is an hypotheses that is formulated and later rejected or nullified,  it is demoted by (HO).
Alternative hypotheses:: This is an hypotheses that differs from a given hypotheses and it is demoted by (HI)

Statistical hypotheses:: when assumption are made or decisions are yet to be taken about a given population which may or may not be true.

POSITIVE ECONOMICS IS THE PROCESS OF EXPRESSING SOMETHING THE WAY IT IS  while  NORMATIVE ECONOMICS IS THE PROCESS OF EXPRESSING SOMETHING THE WAY IT OUGHT TO BE. 

CETERIS PARIBUS meaning ALL THINGS BEING EQUAL

  THEORY OF DEMAND AND SUPPLY

Demand is the amount of goods and services that a consumer is willing to pay and  acquire at a particular time.
Supply is the total number of goods that a supplier is willing to offer at a particular price at a particular  time.

  LAW OF DEMAND

Law of demand  – the higher the price the further down the quantity demanded and the lower the price the higher the quantity demanded.

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DEMAND SCHDULE:: this is a tabular representaton showing relationship between price and quantity demanded.

DEMAND CURVE:: This is a graphical representation showing the relationship between price and quantity demanded.

ECONOMIC INTERDEPENDENCE AND THE GAIN FROM EXCHANGE.

In this exchange,  it involves two parties (individua and Countries)
Illustration below showing No. of hours required to provide 1 unit of each goods as follows.
Table of technology set – this gives the amount of input a produce is required to produce each of the two goods.
Table of production possibility set: The production possibility set gives the combination of the two goods which a producer can produce, given the technology and the producer resources.  40 hours is the producer possibility set of the illustration above (just for example).
 Calculating the opportunity cost of meat and yam for individual A & B
A Table of opportunity cost
               B enjoys absolute advantage in the production of the two goods above at a lower resource cost than other producer.
         Comparative advantage is the ability to produce a goods at a lower opportunity cost than the other producer.

EQUILIBRIUM

Equilibrium point is the point where demand is equal to supply
Equilibrium determination
Any price above equilibrium price will give us excess supply,  if there is excess supply, price must reduce for us to have equilibrium.

If the price is low than the equilibrium price then there will be enormous demand.  However when market price is equal to the equilibrium price, there is no excess supply and there is no excess demand.

ELASTICITY OF DEMAND & SUPPLY

Elasticity means responsibly(responsively) it means to the degree of responsiveness
Elasticity of demand is the level of responsiveness of demand.
    There are three types of demand. 
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross price elasticity of demand.

Price elasticity of demand: This measures the responsiveness of quantity demand to change in price.

Income elasticity of demand: This measures the responsivenes of quantity demanded to an alteration in consumer income.  For normal goods, income elasticity is greater than ZERO (>0),  For inferior goods they have negative income elasticity lesser than ZERO (<0).

Cross price elasticity of demand: Measures the responsiveness of demand of one commodity to a change in the price of another commodity.  When cross price elasticity of demand is greater than zero (>0),  the two goods in question X and Y are substitute goods.   If you compute prices elasticity  of demand, it is negative (<0).  It means the two goods are complentary goods.

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