ECON 101 Lecture Notes - Lecture 2: Ceteris Paribus, Demand Curve, Economic Surplus
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ECON 101 Full Course Notes
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Use theory to build a formal model that allows for testable predictions. Test the model to determine if predictions are supported by observation. Can never prove a model is correct . Only provide evidence that supports the model. Model: a simplified representation of a real situation that is used to better understand real-life situations. We use simplified models because real world is too complex to consider everything at once. Must determine which details are most important. Only use more complicated model if benefit of added understanding exceed cost of complexity. Ceteris paribus: all other things held constant. Ultimately, would like to establish a causal relationship between variables. Hold all other variables fixed in order to investigate effect of changing one variable on another variable. Cannot do this in the real world. Test theories using data and statistical methods. Provides a prediction on what is likely to happen if certain actions are taken. Does not tell us what we should do.
