Economic Models: Assumptions, Deductive Reasoning, and Logical Fallacies
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Steven Suranovic
George Washington University
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Uses deductive reasoning to create simplified real-world
economic relationships
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Models are simplifications!
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Presents these in mathematical and/or graphical form
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Can be used to identify the conditions needed for certain
outcomes to arise
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If X (a set of assumptions) is True … then
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Y ( a set of conclusions or implications) follow logically
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If all dogs have four legs, and if Duke is a dog, then Duke
has four legs.
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What if an assumption is not true … does it follow that the
conclusions are untrue? Answer – No
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For example, If all dogs do not have four legs, and Duke is
a dog, it does not follow that Duke does not have four
legs.
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He still might … we just can’t know for sure
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In economic models then
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Just because some assumptions do not match the real
world, does not mean we can dismiss all the conclusions
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But models will tell us what MUST be true to guarantee
certain outcomes or results
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All of the IFs in an economic model are the ASSUMPTIONS
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Generally there are numerous assumptions
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All of the THENs in a model are the IMPLICATIONS
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Generally there are many fewer implications
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Assumptions that reflect reality are included because they
are an observed feature of the real world.
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Assumptions that are simplifying are included to make the
model tractable (that is, to make it easier to comprehend
and solve)
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If you relax (that is, change or eliminate) a consequential
assumption, then an implication is no longer guaranteed.
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Often, assumptions that reflect reality are consequential
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If you relax (that is, change or eliminate) an
inconsequential assumption, then the implications are not
affected.
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Many assumptions that are simplifying are inconsequential
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Maps can be transformed into a deductive exercise
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Namely, If (x,y,z, etc) are true, then (A, B, C, etc) follow
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Lines are streets
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Street names are accurate
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Arrows are direction of travel
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Breakfast locations accurate
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O at intersections are stop signs
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Etc, etc.
Implications
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Travel along arrowed roads will
lead you out of town
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If you want breakfast, you can
stop at recommended shops
along the way
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Reflect Reality
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Street names are accurate
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Arrows are direction of travel
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Breakfast locations accurate
Simplifying
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Lines are streets
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O at intersections are stop signs
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Many streets and names missing
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Scale is inaccurate
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Bldgs are simple shapes
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Consequential
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Starting location is accurate
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Stop sign locations
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Street names are accurate
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Arrows are direction of travel
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Breakfast locations accurate
Inconsequential
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Lines are streets
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O at intersections are stop signs
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Scale is not accurate
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Assumptions
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Green areas are forested
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Brown lines are contours (iso-
elevation)
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Streets are double black lines
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Structures are small black circles
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Etc.
Implications
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Can use to determine
slope/grade when hiking
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Can used to plan troop
movements for war
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Create different maps (models) for different purposes
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Some assumptions may be the same, some will differ
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There is no ideal map (model)
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Same is true for economic models
Economic models utilize deductive reasoning to simplify real-world economic relationships. Assumptions vs. implications are key components, where assumptions reflect reality or are simplifying. This process helps identify conditions for specific outcomes to occur and distinguishes between consequential and inconsequential assumptions. Despite some assumptions not aligning with reality, models can still provide insights into what conditions are necessary for certain results to occur.
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Presentation Transcript
Economic Models Economic Models Steven Suranovic George Washington University
Economic Models Economic Models Uses deductive reasoning to create simplified real-world economic relationships Models are simplifications! Presents these in mathematical and/or graphical form Can be used to identify the conditions needed for certain outcomes to arise
Deductive Reasoning Deductive Reasoning If X (a set of assumptions) is True then Y ( a set of conclusions or implications) follow logically If all dogs have four legs, and if Duke is a dog, then Duke has four legs.
A Logical Fallacy A Logical Fallacy What if an assumption is not true does it follow that the conclusions are untrue? Answer No For example, If all dogs do not have four legs, and Duke is a dog, it does not follow that Duke does not have four legs. He still might we just can t know for sure
A Logical Fallacy A Logical Fallacy In economic models then Just because some assumptions do not match the real world, does not mean we can dismiss all the conclusions But models will tell us what MUST be true to guarantee certain outcomes or results
Assumptions vs. Implications Assumptions vs. Implications All of the IFs in an economic model are the ASSUMPTIONS Generally there are numerous assumptions All of the THENs in a model are the IMPLICATIONS Generally there are many fewer implications
Types of Assumptions Types of Assumptions Reflect Reality vs. Simplifying Reflect Reality vs. Simplifying Assumptions that reflect reality are included because they are an observed feature of the real world. Assumptions that are simplifying are included to make the model tractable (that is, to make it easier to comprehend and solve)
Types of Assumptions Types of Assumptions Consequential vs. Inconsequential Consequential vs. Inconsequential If you relax (that is, change or eliminate) a consequential assumption, then an implication is no longer guaranteed. Often, assumptions that reflect reality are consequential If you relax (that is, change or eliminate) an inconsequential assumption, then the implications are not affected. Many assumptions that are simplifying are inconsequential
A A Map as a Model Map as a Model Maps can be transformed into a deductive exercise Namely, If (x,y,z, etc) are true, then (A, B, C, etc) follow
Hand Hand- -drawn Map Model drawn Map Model Assumptions Implications Lines are streets Street names are accurate Arrows are direction of travel Breakfast locations accurate O at intersections are stop signs Etc, etc. Travel along arrowed roads will lead you out of town If you want breakfast, you can stop at recommended shops along the way
Assumption Types Assumption Types Reflect Reality Simplifying Lines are streets O at intersections are stop signs Many streets and names missing Scale is inaccurate Bldgs are simple shapes Street names are accurate Arrows are direction of travel Breakfast locations accurate
Assumption Types Assumption Types Consequential Inconsequential Starting location is accurate Stop sign locations Street names are accurate Arrows are direction of travel Breakfast locations accurate Lines are streets O at intersections are stop signs Scale is not accurate
Topo Map Model Topo Map Model Assumptions Implications Green areas are forested Brown lines are contours (iso- elevation) Streets are double black lines Structures are small black circles Etc. Can use to determine slope/grade when hiking Can used to plan troop movements for war
Maps as Models Maps as Models Create different maps (models) for different purposes Some assumptions may be the same, some will differ There is no ideal map (model) Same is true for economic models
