Modelling and the economic method

Explain what an economic model is and why simplifying reality is not a flaw but a necessity. Compare it to a tube map: how is it similar to and how does it differ from the real city?

A café wants a simple model to predict how many coffees it will sell depending on the price it sets. State which two variables the model would include, which things it would leave out (weather, exams, roadworks on the street) and why leaving them out does not make the model useless.

What does the Latin phrase "ceteris paribus" mean and why do economists use it? Give an example applied to the relationship between cinema ticket prices and the number of viewers.

Explain what an economic variable is and give three examples (price, quantity sold, household income). Then, in the statement "if it gets hotter, more ice creams are sold", indicate which variable is to be explained and which is used to explain it.

What is an assumption within a model? Point out two hidden assumptions in this statement: "if the bus fare falls, more students will use it" (think about journey time, distances, or the price of the alternatives).

The figure shows the steps of the scientific method applied to economics, with one step covered by a question mark. State which step is missing and explain what is done in each of the others.

What is a prediction in economics and how do you check whether it was accurate? Give an example of a prediction about the market in your town (rental prices, shop openings) and explain what data you would look at a year later.

One autonomous community raises the minimum wage in its public sector and the neighbouring one does not. Researchers compare the evolution of employment in both before and after.

1. a) What does this testing strategy called a "natural experiment" consist of?
2. b) What assumption must hold for the comparison to be valid? Reason out what could spoil it.

In summer, ice cream sales rise and so do drownings at beaches, but nobody says that ice creams cause drownings. Use this example to explain the difference between correlation and causality, and why confusing them leads to bad decisions.

During an economic recession, a pundit states: "Any sensible family knows that if their income falls, they must tighten their belt and cut their spending as much as possible to get through the rough patch. Therefore, the best policy for the country to overcome the crisis is for all families, businesses, and public administrations to simultaneously reduce their spending by $15\,\%$."

1. a) Relying on the circular flow of income model, refute the pundit's argument: predict what will happen to firms' revenues and employment if all agents attempt to cut their spending at the same time.
2. b) Explain the methodological error the pundit makes by directly extrapolating an individual behavioral pattern (microeconomics) to the whole country (macroeconomics), and propose another economic situation (other than saving or spending) where this same fallacy of composition occurs.