Chapter 1 - Economic Models
What does an economic model provide?
They provide simplified portraits of how individuals make decisions, how firms behave, and how these two groups interact to establish markets.
What are the general methods used for verifying economic models?
There are two: direct and indirect approaches
What is the direct approach to verifying an economic model?
This approach seeks to establish the validity of the basic assumptions on which a model is based on
What is the indirect approach to verifying an economic model?
This approach attempts to confirm validity by showing that a simplified model correctly predicts real-world events.
What is the ultimate test of a theory?
The ultimate test of a theory is the ability to predict real-world events.
What are the common elements of all economic models?
(1) Ceteris paribus (other things the same) assumption;
(2) The supposition that economic decision-makers seek to optimize something;
(3) A careful distinction between "positive" and "normative" questions.
What does positive economics seek to determine?
Positive economics seeks to determine how resources are, in fact, allocated in an economy.
What does normative economics seek to determine?
Normative economics seeks to determine what should be done in an economy.