Models Of Economics

Models are the means through which economists organize their thoughts about human behaviour and its results; they require assumptions and abstractions from the real world. As people's minds are limited and economist could never handle all the details, we must abstract from extraneous factors to isolate and understand some other factors. Economists assume that extraneous factors are constant: that “other things are equal” (Latin phrase: ceteris paribus), or that they have a predictable effect on model.

Good models use relevant factors, and poor don't. In constructing models economists must avoid fallacy of composition and the post hock fallacy.

The fallacy of composition involves generalizing based only on particular experience. For example if the first fox we saw in life was white, we can conclude that all foxes are white. The post hoc fallacy is faulty reasoning of “cause and effect” relations between events. For example “high interest rates cause inflation.”