Companies often build models of their new products, which are more rough and unfinished than the final product, but can still demonstrate how the new product will work.Ī good model to start with in economics is the circular flow diagram ( ). We use models to test theories, but for this course we will use the terms interchangeably.įor example, an architect who is planning a major office building will often build a physical model that sits on a tabletop to show how the entire city block will look after the new building is constructed. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. Sometimes economists use the term model instead of theory. A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying. If done well, this enables the analyst to understand the issue and any problems around it. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. A theory is a simplified representation of how two or more variables interact with each other. ![]() ![]() These assumptions tend to be different than the assumptions an anthropologist or psychologist might use. ![]() They analyze issues and problems using economic theories that are based on particular assumptions about human behavior. Watch this video about John Maynard Keynes and his influence on economics.Įconomists see the world through a different lens than anthropologists, biologists, classicists, or practitioners of any other discipline.
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