Economic Models and Theories: Simplification for Understanding

Introduction

• Economic models are simplified representations of reality.
• Purpose: To observe, understand, and predict economic behavior.

The Meaning of Simplification

• Question: How much realism is desired in a model?
• Common student responses: "As much as possible" or "100%."
• Reality: More realism is not always better.

Example: Map Analogy

• Scenario: Imagine needing a map to attend a party.
• 100% Realism Issue: A map with 1 mile = 1 mile is impractical.
• 100% Detail Problem: Including every detail (rocks, potholes) distracts from the goal.
• Effective Map: Focus on major cross streets and landmarks to achieve the end goal.

Determining Realism in Models

• Goal: Achieve enough realism to reach the end goal.
• Signs of a Good Model: If it helps observe, understand, and predict the topic effectively.

Dealing with Models in the Real World

• Common Concern: "But in the REAL world, isn't it the case that..."
• Response: Remember, it's a model, a simplified reality.
• Outcome with Models: They help in observing, understanding, and predicting economic behaviors.

Types of Models

• Models may be represented as:
  • Verbal statements
  • Tables of data
  • Graphs
  • Mathematical equations

Upcoming Topics

• Next Lecture: Brief review of graphs.
• Future Focus: Setting up a model to examine scarcity and choice.