Models

"(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often." —Alfred Marshall

“To produce something really new, one needs to have a large bag of tricks…And the best way to fill that bag is to see how other economists have approached other problems.” —Paul Krugman, 1996, How to be a Crazy Economist

Perloff 1

A model is a short list of assumptions chosen to generate predictions. Macroeconomics models nations or the world, while microeconomics models markets and other forms of exchange.1 This course focuses on the microeconomics of markets.

How to practice standard economic analysis:

  1. Choose a setting, and include key features with minimal assumptions.
  2. Further assume that people know what they want to do and do it.
  3. Find the equilibrium, at which, by assumption, there are no missed opportunities.
  4. Interpret in terms of trade-offs.
  5. Move the equilibrium, holding all else equal, and find the new equilibrium.
  6. Argue that the predicted equilibrium explains observations, and that omitted features are not important to how things work.

Positive versus normative

A positive claim is about what is, while a normative claim is about what should be.

  • Identify whether a given statement is positive or normative.

More resources

More information

Some other principles of economics:

  • “People respond to (monetary) incentives.”
  • “Resources are scarce”…except ideas and other nonrivalrous goods.

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