6. Models and Theories.pptx

Models and Theories
Tuesday, October 24, 2023 1

Session objectives
At the end of the session students must able to:
 Understand what a model and a theory is,
 Explain contents of a model,
 Discuss ways of model presentation,

Brain storming
• What is a model?
• Define theory?

Models and Theories
 Model :–
 a hypothesis about the relationships among variables.
 abstracts from reality.
 everyone uses models.
 Errors of models:
 the wrong explanatory variables may be included.
 the functional form may be incorrect.
 Theory :-
 a belief or a system of ideas intended to plain some thing
 set of principles on which an activity is based.
 an idea justifying some thing

Contents of models
 Variables: Dependent versus independent variables
 Hypothesized relationships among the variables.
 Tables, graphs, or equations.

Example: a model of heights can be explained as:
age in years
height H = a + b(A)
a
H
A
b = H/ A

Linear and nonlinear model of heights
. Naïve/linear
age in years
height
. Fancy/non linear

Equations of non linear model
 Height = f(age, gender, parents’ heights, nutrition, ...)
Gender effects in the non linear model
• Height = f(age, gender, parents’ heights, nutrition, ...)
height
age
men
women

Model Summary
 Three ways to describe models
 Graphs
 Tables of values
 Mathematical functions (equations)
 Important concepts
 Dependent and independent variables
 Linear function, intercept and slope

An Economic Model: The Production Possibility Curve/Frontier/
PPC/F
 Purposes of model
 Show scarcity constraint
 Illustrate economic efficiency
 Introduce opportunity cost concept
 Variables
 Quantities of goods that may be produced
 Givens
 Total amounts of inputs available
 Technology of production

PPC/F Defined
 The Production Possibility Curve (or frontier) shows:
 the maximum amount of a good you can produce given :
1. the amounts of other goods produced,
2. the total amounts of inputs available, and
3. the technology of production.

Example of PPC/F
 Assumptions:
 There are only two goods, pizza and spaghetti.
 There are limited inputs and given technology of
production.
 Definition:
 The PPC/F shows the maximum amount of pizza you can
produce, given the amount of spaghetti to be produced.

Production Possibility Curve/Frontier
Spaghetti
Pizza
Which points are attainable
and which points are unattainable?
0
100
200
300
400
0 10 20 30 40 50 60

Production Possibility Curve/Frontier…
Spaghetti
Pizza
What’s the effect of an improvement
in the technology for producing spaghetti?
0
100
200
300
400
0 10 20 30 40 50 60

An improvement in spaghetti technology…
 Points “inside” the PPC/F are inefficient.
 For any point “inside”, there corresponds some point that
represents more production of both goods.

Opportunity Cost Defined
 The opportunity cost of doing something is what you must
give up in order to do it.
 Cost of a pizza is what you must give up to consume it,
 Cost of a college education includes both money and other
foregone alternatives.

The PPC/F can show opportunity cost
 Suppose you are at some point on a PPC/F.
 Then suppose you want to consume one more pizza.
 The opportunity cost of one more pizza is the amount of
spaghetti you must give up in order to get it.

The PPC/F ….…
Spaghetti
Pizza
More pizza means less spaghetti
0
100
200
300
400
0 10 20 30 40 50 60

Opportunity cost increases as more of a good is produced
 Not only does more pizza mean less spaghetti, but also each
additional pizza costs more than the one before it.
 This idea shows up as the PPC/F being concave to the origin
i.e. the curve bows out.

Opportunity cost of more pizza is
constant.
Production Possibility Curve/Frontier…
0
100
200
300
400
0 10 20 30 40 50 60
Spaghetti
Pizza

Production Possibility Curve…
 We will use Production Possibilities Curves that are straight
lines (i.e. having constant opportunity cost) to illustrate some
important economic principles.

6. Models and Theories.pptx

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6. Models and Theories.pptx