OVERVIEW. 3. Models are composed of logical reasoning leading from assumptions to conclusions. The conclusions are predictions about the world.

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1 2 METHODS OVERVIEW 8. A social science studies aspects of human behavior through the application of the scientific method. Models are the major tool of the economist. 2. To provide an understanding of the real world, economists rely upon models. Models are a simplification of reality that provide a manageable way to think about the world. 3. Models are composed of logical reasoning leading from assumptions to conclusions. The conclusions are predictions about the world. 4. Models may be divided into many different kinds. In economics, models are either macroeconomic models, models about the whole economy, or microeconomic models, models of how individuals behave. The models may also be either positive models which are descriptive, or normative models which are prescriptive, tell what should be. MATCHING Match the following terms with their meanings. 1. model a is a prediction of behavior 2. definition 3. assumptions 4. conclusion 5. positive 6. normative 7. micro 8. macro b. models that prescribe c. gives a name to an idea d. models of the whole economy e. models of individual behavior f. a simplification of reality g. are the simplifying device h. models that describe TRUE-FALSE Mark the following statements as T (for true) or F (for false). 1. A positive statement makes a prediction. 1

2 2. Microeconomics is about the whole economy. 3. Models are used to simplify reality. 4. The statement following if is sometimes called the conclusion. 5. A definition gives a name to a concept. IN THE NEWS 1. Technological innovations have made flight simulators even more realistic. Many people cannot wait to own one. a. In what way is the flight simulator a model? b. Would you be comfortable with a new user as a pilot? Why or why not c. Why might some flight schools use simulators instead of actually having students flying an airplane? 2. The U.S. Congress will be discussing legislation that will change how estates are taxed. One prominent issue is the size of the estate that is not taxable. Some want the first million to be tax free. Others want the first five million to be tax free. a. Is this a micro issue or macro issue? b. Is this issue normative or positive? 3. Some executives for the Enron corporation have been found guilty of fraud and sentenced to jail. Their accounting practices seem to have been a little too creative and violated the standards of the accounting profession and the law. a. Is this a micro or macro issue? b Is this issue more normative or positive? 4. In the year 1492, Christopher Columbus set off to find a new route to the Indies. At the time, he was widely seen as a buffoon for his belief that he could reach the Indies by sailing west, when the Indies were to the east. a. Columbus had a model of the world. What was the key assumption that he made that caused him to think he could reach the east by going west? b. What would have happened if he had been wrong? 2

3 5. Consumers who are weight conscious, may find that their best efforts are sabotaged. When they buy items at the grocery store labeled lite, the items may not be low calorie or less fat. a. In terms of the concepts studied in this chapter, what is the problem the consumer faces? b. How might this issue be resolved? Who is likely to step in and provide a uniform definition of the term lite? Circle the correct answer. PRACTICE TEST 1. If resources are fully employed, is a(n): a. definition.. b. assumption. c. conclusion. d. evaluation. 2. Which of the following is false? a. Economics deals with explain questions. b. Economics deals with predictive questions. c. Assumptions are simplifying devices. d. Macro models cannot be normative. 3. A conclusion is a testable prediction about reality: a. in macroeconomics only. b. in microeconomics only. c. in positive economics only. d. in both micro and macroeconomics.. 4. A normative statement is one that: a. tells how things are. b. tells how things should be. c. defines opportunity cost. d. represents reality. 5. Students pay too much for their books is a statement. Every student has at least two classes every day is a statement. a. Positive, positive b. positive, normative c. normative, positive d. normative, normative 3

4 Matching 1. f 2. c 3. g 4. a 5. h 6. b 7. e 8. d ANSWERS True-False 1. F 2. T 3. T 4. F 5. T Problems In the News l. a. Clearly, the flight simulator is a model of how a real airplane flies. It is not a real airplane, and though it can be made to do many things a real plane does, it is not a real airplane. b. Most of us would be hesitant to be the first passenger with someone who had only practiced flying with a flight simulator and had no real experience with an airplane. c. Flight training is expensive, especially time actually flying an airplane. Hence a flight school would want to make the cost smaller by providing some part of the training on the ground in a simulator. They might find the simulator effective at teaching some skills at low cost. But there are requirements about the amount of time one has to actually pilot an airplane before one becomes receives a license. 2. a. This issue is one that has elements of both micro and macro. On the one hand, it is clearly macro as it deals with the whole economy and the tax revenues that could be collected from this source. But for any one estate, the issue appears to be a micro issue affecting how that one estate will be taxed. b. This is primarily a normative issue, a question of what amount of income should be taxed. While there are positive elements that go into the discussion, the ultimate question of the amount to be taxed is a normative issue. 3. a. This item discusses what happened with a single firm. It is a micro question. b. The item is more positive, what happened, and how that action compared to existing standards of behavior. 4. a. Columbus model had an essential assumption, that the world is round. That is how he expected to get to the east by going west. 4

5 b. If you were a contemporary of Columbus and did not believe the world was round, you would have predicted that Columbus would have fallen off the edge of the world. 5. a. The primary issue is how the term lite is defined. Some define lite with reference to calories and some define lite with reference to fat. b. As it turns out, the U.S. Food and Drug Administration has provided a definition of lite. l.b., 2.d., 3.d., 4.b., 5.c. Practice Test 5