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RISK PREMIUM: This has two very closely related uses. First, it's what risk averse people are willing to pay to avoid a risky situation. For example, if you would be equally happy with a guaranteed $900 or a 50-50 chance of getting either $500 or $1,500, then you're risk premium is $100. Second, it's the extra percentage points added to an interest rate to compensate for the risk of a loan. As a general rule, each 1 percent chance of default on a loan adds a risk premium of about 1 percent to the interest rate.

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Lesson Contents
Unit 1: The Method
  • Overview
  • Components
  • A Process
  • Unit 1 Summary
  • Unit 2: Theory
  • Concept
  • Abstraction
  • Economic Theories
  • Unit 2 Summary
  • Unit 3: Verification
  • Overview & Data
  • Evaluation
  • Evaluation:Don't Agree
  • Unit 3 Summary
  • Unit 4: Science and Practice
  • Set Up
  • Theory
  • Verification
  • Unit 4 Summary
  • Unit 5: Cause and Effect
  • Purpose
  • An Example
  • Analysis
  • Unit 5 Summary
  • Course Home
    Economic Science

    In this lesson you'll see why and how the scientific method is a process of discovery. You'll see that it's a process of building theories to explain the workings of the world (the economy) by proposing then testing hypotheses. The five units making up this lesson will guide you through the basics of the scientific method and how it's used in the study of economics.

    • The first unit, The Method, introduces the scientific method, especially its' four key components -- theories, principles, hypothesis, and data.
    • The second unit, Theory, then takes a closer look at theories, including the central role played by abstraction.
    • In the third unit, Verification, we focus on the process of verification -- how and why hypothesized relationships about the workings of the economy are compared with actual data.
    • We then turn out attention in the fourth unit, Science and Practice, to a simple example of how the scientific method is used to test a hypothesized relation between course grades and where students are seated in a classroom.
    • The fifth and final unit in this lesson, Cause and Effect, examines the role that cause and effect plays in the scientific method and economic science.

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    LABOR

    The mental and physical human efforts used in the production of goods and services. This is one of four basic categories of resources, or factors of production. The other three are capital, land, and entrepreneurship.

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    APLS

    BEIGE MUNDORTLE
    [What's This?]

    Today, you are likely to spend a great deal of time going from convenience store to convenience store seeking to buy either a set of luggage with wheels or a birthday gift for your aunt. Be on the lookout for fairy dust that tastes like salt.
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    This isn't me! What am I?

    Post WWI induced hyperinflation in German in the early 1900s raised prices by 726 million times from 1918 to 1923.
    "Defeat is simply a signal to press onward."

    -- Helen Keller, lecturer, author

    GLS
    Generalized Least Squares
    A PEDestrian's Guide
    Xtra Credit
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