This document discusses models and theories. It provides definitions of models as hypotheses about relationships between variables that abstract from reality, while theories are systems of ideas intended to explain something. The document outlines contents of models, including variables, relationships, and ways of presentation through tables, graphs or equations. It provides examples of linear and nonlinear models of height and a production possibility curve model showing the tradeoff between two goods given limited resources. Key concepts discussed are dependent and independent variables, opportunity cost, and how a PPC can illustrate the scarcity principle and efficiency.

1. Models and Theories
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2. 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,
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3. Brain storming
• What is a model?
• Define theory?
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4. 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
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5. Contents of models
 Variables: Dependent versus independent variables
 Hypothesized relationships among the variables.
 Tables, graphs, or equations.
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6. Example: a model of heights can be explained as:
age in years
height H = a + b(A)
a
H
A
b = H/ A
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7. Linear and nonlinear model of heights
. Naïve/linear
age in years
height
. Fancy/non linear
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8. 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
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9. 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
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10. 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
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11. 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.
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12. 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.
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13. 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
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14. 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
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15. 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.
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16. 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.
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17. 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.
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18. The PPC/F ….…
Spaghetti
Pizza
More pizza means less spaghetti
0
100
200
300
400
0 10 20 30 40 50 60
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19. 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.
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20. 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
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21. 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.
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