How Economists Use Theories and Models to Understand Economic Issues *

Transcription

1 OpenStax-CNX module: m How Economists Use Theories and Models to Understand Economic Issues * Alex Van der Merwe Based on How Economists Use Theories and Models to Understand Economic Issues by OpenStax This work is produced by OpenStax-CNX and licensed under the Creative Commons Attribution License 4.0 By the end of this section, you will be able to: Abstract Interpret a circular ow diagram Explain the importance of economic theories and models Describe goods and services markets and labor markets * Version 1.1: Oct 22, :47 pm

2 OpenStax-CNX module: m John Maynard Keynes Figure 1: One of the most inuential economists in modern times was John Maynard Keynes. (Credit: Wikimedia Commons) John Maynard Keynes ( ), one of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking. Keynes, shown in Figure 1, famously wrote in the introduction to the Cambridge Economics Handbooks series: [Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions. (Keynes: 1922: v.) In other words, economics teaches you how to think, not what to think. note: Watch this video 1 about John Maynard Keynes and his inuence on economics. 1

3 OpenStax-CNX module: m Economists view the world dierently to practitioners of other disciplines. They analyze issues and problems using economic theories that are based on particular assumptions about human behavior, that are dierent from the assumptions an anthropologist or psychologist might use. A theory is a simplied representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to be understood, while complex enough to capture the key features of the object or situation being studied. Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is more applied or empirical representation. Models are used to test theories, but for this course we will use the terms interchangeably.

4 OpenStax-CNX module: m ,height!,height! % m63261;airplane.jpg;;;6.0;8.5 Figure 2: A model of a fighter jet (Credit: FlickR Creative Commons by 2.0) For example, an architect who is planning a major office building will often build a small-scale p 1 Economics is a social science Economics is a social science since it is concerned with the choices people (society) make. Economics ex Economics has its own special words (terminology) which you should become familiar with. This is Assumptions help economists to generalize.the most important assumption in economics that allows Since economics is a social science, allowance has to be made for the fact that people may perce The laws, principles, theories and models that are produced by economists with the help of gener A good model to start with in economics is the circular flow diagram, which is shown in Figure 3.

5 OpenStax-CNX module: m ,height!,height! % Figure 3: The circular flow diagram shows how households and firms interact in the goods and ser Of course, in the real world, there are many different markets for goods and services and markets This version of the circular flow model is stripped down to the essentials, but it has enough feat Economists have their own methods or tools to carry out their investigations. When they see an eco

6 OpenStax-CNX module: m ,height!,height! Figure 4: Some economics tools. 2 Key Concepts and Summary Economists analyze problems differently than do other disciplinary experts. The main tools econo

7 OpenStax-CNX module: m Self-Check Questions Exercise 1 (Solution on p.??-idp ) Suppose we extend the simple 2-sector circular flow model (complete with product and fac Exercise 2 (Solution on p.??-idm ) What is an example of a problem in the world today, not mentioned in the chapter, that h 4 Review Questions Exercise 3 How did John Maynard Keynes define economics?

8 OpenStax-CNX module: m Exercise 4 Are households primarily buyers or sellers in the goods and services market? In the labo Exercise 5 Are firms primarily buyers or sellers in the goods and services market? In the labor mar References Keynes, J.M Introduction to the Cambridge Economics Handbooks series. In: Robertson, D.H M

9 OpenStax-CNX module: m Solutions to Exercises in this Module Solution to Exercise (p.??-idp ) Draw a box outside the original circular flow to represent the foreign country. Draw an arro Solution to Exercise (p.??-idp ) There are many such problems. Consider the AIDS epidemic. Why are so few AIDS patients in Af Glossary Definition 1: circular flow diagram a diagram that views the economy as consisting of households and firms interacting in a goods and se Definition 1: goods and services market a market in which firms are sellers of what they produce and households are buyers Definition 1: labor market the market in which households sell their labor as workers to business firms or other employers

10 OpenStax-CNX module: m model see theory Definition 1: Definition 1: theory a representation of an object or situation that is simplified while including enough of the key feat

11 OpenStax-CNX module: m