Big Idea Economists construct and use models to

Big Idea: Economists construct and use models to investigate, explain and predict economic behavior

I. Introduction • Economics is divided into two fields • Microeconomics-deals with behavior and decisions by individuals and firms • Macroeconomics-deals with economy as a whole and decisions by the govt

II. Economic Models • The purpose of economic models is to explain and predict economic behavior • Production Possibilities Curve is an economic model • Shows the maximum combinations of goods and services that can be produced from a specific amount of resources in a given amount of time

II. Economic Models Economists study parts of the economy o Ex: teenage employment rates, how the rich spend their money They formulate theories and gather data from the real world These theories become economic models which help and explain economic behavior Just like model cars, trains or houses-they are representations of the real world Models show basic factors needed to analyze the problem

II. What Models Show • The purpose of economic models is to show visual representations of economic behavior • Models all relate to the way consumers and businesspeople react to changes around them • The most common economic model is a line graph • These models help economists analyze a problem • Economic models assume that factors remain constant

IV. Creating A Model • Models are useful for economists to analyze the way things work • They start with some idea about the way things work, then collect facts and data and discard what is not relevant • Economists can test theories, or models, the same way scientists test a hypothesis-an educated guess or prediction • Next economists tests models to see if they represent reality

V. Testing A Model • Testing a model allows economists to see if the model does a good job of representing reality • They collect data and analyze it over a period of time

IV. Schools of Thought • Not all economists agree that a theory offers the best prediction • Some think their theories are better than others • Ex: throughout history, economists stress the importance of the govt having a “hands off” policy in business-others think the govt should intervene in the economy to prevent unemployment and prevent rising prices

IV. Schools of Thought • Learning about economics can help you predict what might happen if policies are followed • It will not tell you if the results will be good or bad • Judgements about these results will depend on a persons values • Values are the beliefs that a person considers importantlike religious freedom, equal opportunity, freedom from govt, etc. • Even having the same value system doesn’t mean all people will agree on solutions to economic problems