In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using mathematical techniques. Frequently, economic models posit structural parameters. Structural parameters are underlying parameters in a model or class of models. A model may have various parameters and those parameters may change to create various properties. Methodological uses of models include investigation, theorizing, and fitting theories to the world.

2. LEARNING OUTCOMES
• Methods of Economics
• Theories and models
• Scarcity, Choices, and opportunities

3. ECONOMIC METHODOLOGY
• It is the study of methods, especially the scientific
method, in relation to economics, including principles
underlying economic reasoning.
• In contemporary English, 'methodology' may reference
theoretical or systematic aspects of a method (or several
methods).

4. THE METHODS OF ECONOMICS
• Positive economics studies economic behavior without
making judgments. It describes what exists and how it works.
• Normative economics, also called policy economics,
analyzes outcomes of economic behavior, evaluates them as
good or bad, and may prescribe courses of action.
Positive economics includes:
Descriptive economics, which involves the compilation of
data that describe phenomena and facts.

5. Economic theory, which involves building models of
behavior.
• An economic theory is a general statement of cause and
effect, action and reaction.
Empirical economics refers to the collection and use of
data to test economic theories.
• Many data sets are available to facilitate economic
research. They are collected by both government agencies
and private companies.

6. ECONOMIC MODELS
- All models simplify reality in order to improve our
understanding of it. The economy consists of millions of
people engage in many activities, buying, selling,
manufacturing and so on.
- To understand how the economy is organized and
work, we need a model that would explain it further.

7. ECONOMIC MODELS
• Circular Flow Diagram:
The inner loop of the diagram, represent the flow of
goods and services using the inputs such as labor,
land and capital combined efficiently by the
entrepreneur. These inputs are known as the factors
of production owned by the household who in return
consume all the goods and services produce by the
firm.
• Production Possibilities Model

8. CIRCULAR FLOW CHART: TWO SECTOR MODEL,
NO SAVING ECONOMY

9. CIRCULAR FLOW CHART: TWO SECTOR MODEL,
SAVING ECONOMY

10. CIRCULAR FLOW CHART: THREE SECTOR
MODEL

11. CIRCULAR FLOW FOUR SECTOR MODEL

12. LO5
Production Possibilities Model
• Illustrates production choices
• Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods

13. LO5
Production Possibilities Table
Type of Product
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
Production Alternatives
A B C D E
10 9 7 4 0
0 1 2 3 4
Plot the Points to Create the Graph…

14. LO5
Production Possibilities Curve
Pizzas
IndustrialRobots
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
B
C
D
E
U
The law of
increasing
opportunity
costs makes
the PPC
concave.

15. Optimal Allocation
LO5
a
b
c
d
e
MB = MC
MC
MB
15
10
5
0
1 2 3
Quantity of Pizza
MarginalBenefit&MarginalCost

16. LO6
A Growing Economy
• Economic Growth
• More resources
• Improved resource quality
• Technological advances

17. Type of Product
Pizzas
(in hundred thousands)
Industrial Robots
(in thousands)
Production Alternatives
A' B' C' D' E'
14 12 9 5 0
0 2 4 6 8
A Growing Economy
LO6

18. LO6
A Growing Economy
Pizzas
IndustrialRobots
Attainable
0 1 2 3 4 5 6 7 8 9
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
B
C
D
E
Economic
Growth
Now Attainable
A’
B’
C’
D’
E’

19. LO6
Present Choices, Future Possibilities
Goods for the Present
GoodsfortheFuture
GoodsfortheFuture
Goods for the Present
P
F
Current
Curve
Current
Curve
Future
Curve
Future
Curve
Presentville Futureville

20. SCARCITY, CHOICES, AND OPPORTUNITY

21. ECONOMIC RESOURCES
• Land – refers to all natural resources.
• Labor – refers to all the physical and mental efforts of
man which can be used to produce goods and services.
• Capital – refers to all man-made aids to production.
• Entrepreneur – is a person who sets up a firm by
combining and organizing land, labor, and capital to
supply a good or service that he thinks society wants.