Economic methodology — practice questions

(a) Positive — a testable hypothesis about cause and effect; can be checked with employment data.

(b) Normative — "ought to" expresses a value judgement about desirable policy.

(c) Positive — a factual claim verifiable from official statistics.

Exam tip: In evaluation essays, use positive analysis first (what happens), then normative judgement (whether it is desirable).

(a) Calculate Current Quantity Demanded:

1. Start with the demand equation: $Qd = 800 - 20P + 0.5Y$
2. Substitute the current values (P = $15, Y =$600): $Qd = 800 - 20(15) + 0.5(600)$
3. Calculate the components:
   • Price component: $20 * 15 = 300$
   • Income component: $0.5 * 600 = 300$
4. Solve for Qd: $Qd = 800 - 300 + 300$ $Qd = 800$ units.

The current quantity demanded is 800 units.

(b) Calculate New Quantity Demanded (Ceteris Paribus):

1. Apply the ceteris paribus assumption: This means only the price (P) changes. Income (Y) is held constant at $600.
2. Use the new price (P = $18) in the equation: $Qd' = 800 - 20(18) + 0.5(600)$
3. Calculate the new components:
   • New price component: $20 * 18 = 360$
   • Income component (unchanged): $0.5 * 600 = 300$
4. Solve for the new Qd (Qd'): $Qd' = 800 - 360 + 300$ $Qd' = 740$ units.

The new quantity demanded is 740 units. 5. Calculate the change in quantity demanded: $Change = New Qd - Old Qd = 740 - 800 = -60$ units.

Conclusion: With the price increase from $15 to $18, and holding income constant (ceteris paribus), the quantity demanded decreases by 60 units. This calculation demonstrates how economists use models and assumptions to isolate the effect of a single variable.