1.6 Economic Models and Ways of Thinking

Notes

• Economic models are simplified versions of reality, such as the PPF. They use assumptions to focus on the most important variables and to make predictions.
• Ceteris paribus is Latin for "all other things held constant." Models change one variable at a time to see its effect.
• Positive statements describe what is or what will happen and can be tested with evidence: "If movie ticket prices rise, fewer tickets will be sold."
• Normative statements express opinions about what should be: "The city should build a new stadium." Economists often agree on positive analysis but reach different normative conclusions because people hold different values.
• Economists usually assume rational choice: people weigh costs and benefits to pursue their goals. Behavioral economics studies when people act otherwise, for example because of habits or emotions.
• Correlation is not causation: two things moving together does not prove one causes the other.