Before you start, make sure you know: Economics as a science (High School Year 1 (semesters 1 and 2))
Every February 14, flowers go up in price and, even so, flower shops fill up. How can an economist explain something so tangled, with millions of buyers and sellers deciding at the same time? You can't put a whole country in a laboratory. What economists do is build models: simple versions of reality that keep only what matters. At the end of the page you'll come back to this case.
Economic models
Simplifying is not a flaw; it is the whole point. A model that reproduced every detail would be as complicated as reality and would not help us understand anything. A model is judged by how well it explains and predicts, not by how much it resembles the world.
Practice★☆☆Not started
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…
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 model of the sandwich market assumes that all buyers know the prices of all cafeterias and that all sandwiches are identical. a) Why are these assumptions not met in…
A model of the sandwich market assumes that all buyers know the prices of all cafeterias and that all sandwiches are identical.
a) Why are these assumptions not met in reality?
b) Why can the model still be useful despite this?
Why do it this way? Because if two things change at once, we don't know which one to credit with the result. You will use this idea in supply and demand.
Let's look at a model with a table and a graph. A street-market stall sells bouquets of flowers. These are the data ceteris paribus (same day, same quality, same competitors):
Price per bouquet (P)
Bouquets bought (Qd)
\$100
20
\$80
30
\$60
40
\$40
50
Here the price is the explanatory variable and the quantity is the explained one: every time P drops \$20, Qd rises by 10.
Practice★☆☆Not started
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…
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.
In the model "the higher the ticket price, the fewer bus passengers", indicate which variable the model tries to explain and which is taken as a starting given. Propose…
In the model "the higher the ticket price, the fewer bus passengers", indicate which variable the model tries to explain and which is taken as a starting given. Propose two external factors that the model leaves out and that could alter the result.
Since economics can rarely repeat an experiment on a large scale, it uses several approaches: classroom or laboratory experiments (for example, a simulated auction with points), natural experiments (comparing two real situations that differ only in what you are interested in), and the analysis of real data. Controlled experiments make it possible to see the effect of a single variable, but their participants and their stakes are artificial, and so they may not reflect real behavior.
Practice★☆☆Not started
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…
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.
In a classroom, an auction is simulated: the teacher "sells" ten cinema tickets and the students bid using points redeemable for supplies. a) What does this consist of…
In a classroom, an auction is simulated: the teacher "sells" ten cinema tickets and the students bid using points redeemable for supplies.
a) What does this consist of as an economic experiment?
b) State one advantage and one limitation of learning economics through classroom experiments instead of observing the real world.
A consultancy predicts using a model that raising train tickets by $10\ \%$ will reduce passengers by $5\ \%$. The following year, the price rises by $10\ \%$ and…
A consultancy predicts using a model that raising train tickets by $10\ \%$ will reduce passengers by $5\ \%$. The following year, the price rises by $10\ \%$ and passenger numbers fall by $12\ \%$.
a) Give two possible explanations for the failure of the prediction.
b) Does the failure mean that the model was useless? Reason your answer.
Correlation, causation, and the fallacy of composition
Go back to the beginning: the rise in flower prices on February 14 is explained by a model in which demand rises (explanatory variable) and, ceteris paribus, the price goes up even though there are more buyers. It is a simplification, but a useful one: we test it against the actual prices each year and correct it if it fails.
To practice designing a complete model, try these exercises:
Practice★★★Not started
We want to model why some newsagents sell more than others. Design the model: choose three variables you would include, two reasonable simplifying assumptions, and…
We want to model why some newsagents sell more than others. Design the model: choose three variables you would include, two reasonable simplifying assumptions, and explain how you would check whether the model works.
To test whether a new rent subsidy of $\$250$ per month for young people makes housing more affordable for them or ends up driving up rents, a government proposes: "Let us implement it across the entire country for one year and observe whether average rent prices go up or down." Several economists point out that such a test would not allow valid scientific conclusions to be drawn.
a) Justify why the government's proposal fails from the point of view of the scientific method: why does a simple "before and after" price comparison fail to isolate the effect of the subsidy (breakdown of the ceteris paribus condition)?
b) Faced with the impossibility of experimenting in a closed laboratory, design a strategy based on a "natural experiment" (for example, comparing bordering geographic areas or groups with and without the subsidy) that makes it possible to empirically test the impact of the policy.