The Process of Developing Models
- Economics is a social science
- It studies societies and the human interactions within those societies
- Human interactions are complex and are influenced by many variables
- Social sciences also include subjects such as Psychology, Politics, Geography and Business Studies
- Due to the complexities within societies, economists build models so as to better understand certain interactions
- A model is a simplified version of reality
- Some models are more complex than others. For example, the Circular Flow of Income model seeks to demonstrate the interactions of all economic agents (firms, households, government, banks, international trade) within an entire economy
- All models make a range of assumptions. These are often generalisations about behaviour, choices and likely outcomes
- These assumptions are necessary so as to account for complex human behaviour and constantly changing variables
- When evaluating different models, the underlying assumptions should always be considered
- To think like an economist involves identifying which variables will be studied and which ones will be excluded
- It considers the type of relationship between variables (causal or correlation). For example, data shows that when ice cream sales increase, so do car thefts. Correlation, yes. Causation, no
- Some economists will build an argument to include certain variables in a study and others will argue to exclude them. They will each provide a justification for their decision
- Two economists analysing the same data may end up with vastly different interpretations. This is often due to the different variables that each economist chooses to focus on. This is the complexity found within social sciences
