Economic Models and Theories

Economists measure and 1)______ the material side of life, but their main 2)______ is to understand how economies operate. In 3)______, as in other fields, understanding is valuable because it 4)______ us to use logic to answer ‘what if’ questions.

For instance, if you understand how a car operates you can 5)______ what will happen to any car if it runs out of gas. To make such a 6)______ you apply basic logic to a simple description or 7)______ of automobile operation. The simpler the model the easier it is to use it to give general answers to ‘what if’ questions but the less 8)______ the predictions it 9)______. Thus, the simplest 10)______ of auto operation would predict only that any car’s engine will stop if it runs out of 11)______, while a more complex model might enable you 12)______ how far a particular car would move, depending on the road and its speed, when the gas ran out.

Real economies are too 13)______ to think about logically in 14)______, there are too many different 15)______, services, firms, workers and consumers to keep track of. In order 16)______ understandable descriptions of reality, we must 17)______ drastically. But it then follows that all economic theories are wrong - since they leave out some aspects of 18)______. Does it 19)______ generally correct answers to questions of interest? Another way to put this is that the predictions of 20)______ models should be consistent with the available evidence.

VIII. Give terms for the following:

1. A sequence of measurements of a variable at different points in time.

2. The price of a commodity relative to the general price level for goods.

3. A simplifying assumption which enables the economist to focus on key economic relationships.

4. A deliberate simplification of reality based on a series of simplifying assumptions from which it may be deduced how people will behave.

5. An index of the prices of goods purchased by a typical household.

6. The percentage change in a variable per period (typically per year).

7. Measurements of an economic variable at a point in time for different individuals or group of individuals.

8. A way of expressing data relative to a given base value.

9. A graphical device to show how two variables are related.

10. Pieces of information relating to economic variables.