Economic Theory and Models

Economic theories simplify reality to allow us to understand basic economic forces and how individuals cope with the problems of scarcity. We can observe actions and their consequences. Observation and description are not sufficient for understanding and ultimately predicting actions. Theory establishes relationships between cause and effect. We use it to interpret actions and outcomes so we can explain the process by which the actions were undertaken and the outcomes achieved. The purpose of theory in all scientific analyses is to explain the causes of phenomena we observe. To conduct economic analyses we frequently need to engage in abstraction. This involves making assumptions about the economic environment and human motivation that simplify the real world enough to allow us to isolate forces of cause and effect. Any theory is a simplification of actual relationships.

An economic model is a simplified way of expressing how some sector of the economy functions. An economic model contains assumptions that establish relationships among economic variables. We use logic, graphs, or mathematics to determine the consequences of the assumptions. In this way we can use the model to make predictions about how a change in economic conditions results in changes in decisions affecting economic variables. Economists often use the term “model” as a synonym for theory.

B. Translate into English.

Экономика – это общественная наука, изучающая поведение в сферах производства, потребления, распределения и обмена. Экономисты анализируют происходящие в этих сферах процессы и исследуют их последствия для физических лиц, организаций, например фирм, и общества в целом. В экономической науке существует много конкурирующих между собой направлений, однако основным делением является деление на классическую и неоклассическую школы.

В систему экономических наук входят науки, которые изучают функциональные аспекты развития экономики (финансы и кредит, ценообразование, экономика труда, материально-техническое обеспечение, планирование экономического и социального развития и др.) или ее отраслевые особенности (экономики промышленности, сельского хозяйства, транспорта и др.).

LISTENING

Listen to the interview with Denis Mac Shane, a British Member of Parliament for the Labour Party and answer the following questions.

1. Why does MacShane think that manufacturing has a future?

2. Why does MacShane think that manufacturing has a future in the advanced countries?

3. Why, however, is this manufacturing unlikely to solve the problem of unemployment?

4. What does MacShane mean by “in theory there should be no more manufacturing in Switzerland?” (It is this theory that makes many people argue that manufacturing must move to “less-developed” countries.)

5. Why does he say it is surprising for a British company to be buying Swiss goods?

6. What is the reason he gives for the United States still being the richest nation in the world?

Speaking Discuss the following questions.

1. Do you agree that economics is helpful in every day life? Give your arguments.

2. Try to think of several important decisions that you have made recently. What was the opportunity cost of each decision?

3. Do you think economics is a theoretical or applied discipline?

4. Imagine a world without a problem of scarcity. Would you enjoy living in such a world?