What is an economic model ? It is a simplified version of economic reality. Models “abstract” from many features of the real world. We do this to avoid unnecessary complication--we want to keep things simple.
Ceteris paribus assumptions enable one to say something about the relationship of X and Y without the intrusion of Z. Example: How do Pepsi sales (X) respond to a change in the price of Pepsi (Y), ceteris paribus? X = Pepsi Sales( 12-packs) Y = Price of Pepsi per 12-pack $3.25 $ , due to change in X, holding Z (say, the price of Coke), constant
Positive is what is. Normative is what ought to be ¢ Positive economics attempts to set forth scientific statements--that is, statements subject to verification or falsification. For instance: ¢“ If they raise tuition again at ASU, enrollment will decline.” OR: ¢ “The Christmas season will be a bust because consumers are near their credit limit on charge cards.”
College professors are underpaid I say professors are overpaid Who is right? It is a normative question.
Beware of these pitfalls as you begin to reason about relationships among economic variables To commit the fallacy of composition is to suppose that what is true in the individual case also holds true for the group. Example: “The best way to leave a burning theater is to run for the exit.”
I washed my spaceship today, and that’s why it rained You’ve committed the post hoc, ergo propter hoc, or “association as causation” fallacy!
à Micro means “small.” à Macro means “large” Micro is focused on individual households and firms, prices quantities of specific goods and services, and the value of economic resources.
By contrast, macroeconomics is concerned with: + Total output of goods and services in the economy per unit of time. + Total employment. + Total income earned (wages, salaries, profits, rental income, interest) per unit of time. + Capacity utilization. + Changes in the average prices of goods and services The micro problem is scarcity. The macro problem is under- utilization of resources