Using Models

1
Using Models

• Chapter 2-3

2
What is a model

• ? Simplified representations of reality play a
  crucial role in economics.

3
Models in Economics

• A model is a simplified representation of a real
  situation that is used to better understand
  real-life situations.
• Create a real but simplified economy
• Simulate an economy on a computer

4
Ceteris Paribus

• Economist make many assumptions as they create
  these models.
• The other things equal assumption means that
  all other relevant factors remain unchanged.

5
Using Models

• Positive economics is the branch of economic
  analysis that describes the way the economy
  actually works.
• Normative economics makes prescriptions about the
  way the economy should work.
• A forecast is a simple prediction of the future.

6
Positive vs.. Normative

• Facts and forecasts
• Usually debate is based on accuracy of data
• The question of how it should be
• Usually debate is based on perspective of
  fairness

7
Using Models

• Economists can determine correct answers for
  positive questions, but typically not for
  normative questions, which involve value
  judgments.
• The exceptions are when policies designed to
  achieve a certain prescription can be clearly
  ranked in terms of efficiency.
• It is important to understand that economists
  dont use complex models to show how clever they
  are, but rather because they are not clever
  enough to analyze the real world as it is.

8
When and Why Economists Disagree

• There are two main reasons economists disagree
• They may disagree about which simplifications
  to make in a model.
• They may disagree about values.

9
Simplifying Assumptions making life complicated

• Since economist rely heavily on modeling
• Which are simplified representations of reality
• Economist argue about which simplifications are
  appropriate.

10
Simplifying assumptions

• Since they use different models with different
  assumptions they end up with different
  conclusions.

11
Values can differ

• Different people (economist are people too) bring
  their values with them to any analysis
• Tax example in the book

12
Finally

• Economics is a method
• NOT a set of conclusions!