AM22 Models

Understanding, Building and Using Models

Lecture explains details of how models are constructed, what they are, and how they relate to reality. The role and meaning of exogenous and endogenous variables is explained. (Delivered: Tuesday 19th Dec 2017)

Be sure to have watched EARLIER lecture on this topic: AML20b: Models and Reality.

Very important, detailed discussion of Models is available from first lecture in my course on Prob & Stat: Islamic Approach: See Models Versus Reality

Sample Question for Final:

Models are simplified mental constructs used to understand a complex reality. Therefore, they can never be criticised for failing to match reality -- the two (models and reality) are different kinds of objects. There are two grounds on which models CAN be criticised -- (i) for being so complex that we cannot understand them, and (ii) for failing to represent reality -- that is real phenomena are different from what the model predicts.

An INVALID critique of utility maximization model is that someone does not know calculus, and hence cannot calculate first order conditions for maximum

a VALID critique is that predictions of utility maximization do not match observed behavior of human beings.

Provide an example of an INVALID critique of economic theory according to the explanation given above -- this is how Friedman defends wrong assumptions of economic theory, and this is the stanard defense used by economists today to defend unrealistic assumptions.

Provide an example of a VALID critique, according to the explanations given above.

Dear Students

Your schedule for the next two weeks will be as follows:

I will take class on Tuesday 19th Dec, insha Allah. I will cover the topic What are Models, How to Construct Good Models, and the role of Exogeneity and Endogeneity in Models. I will explain how conventional economics textbooks mix up these concepts and create confusion in minds of students.

The next three classes will be taken by students from my previous advanced micro class:

Sabila Khatoon <sabila_15@pide.edu.pk>,

Adeel Ahmed <fatalsigns@gmail.com>,

fouzia yasmin <fouziayasmin786@yahoo.com>

Maaz Javed <maazjaved_13@pide.edu.pk>

These classes will be run on an inverted classroom pattern. You will watch lectures before coming to class. At the start of the class there will be a ten-minute quiz on the materials that you have to study before coming to class -- this is to ensure that you do the required work before coming to class. After the quiz, the students will discuss the lecture, and go over any difficulties or confusions you may be having with the material.

For the THURSDAY class on 21st December, you are required to study TWO lectures from the previous classes:

Lecture L8: Seventy years of Economists Failure to Understand the Labor Market:

https://sites.google.com/site/economicsislamicapproach/l8

Lecture L9: Supply and Demand in Varian's Model of Housing Rental

https://sites.google.com/site/economicsislamicapproach/l9-s-d

For the next week, 26th and 28th December, you will be responsible for covering the next three lectures: L10, L11 and L12 listed and linked below:

L10: Theory of Value:

https://sites.google.com/site/economicsislamicapproach/l10-value

L11: Theory of Value (continued)

https://sites.google.com/site/economicsislamicapproach/ll-11

The above two lectures should be covered on the weekend, before class on Tuesday 26th December. The last lecture should be covered between Tuesday and Thursday Dec. 28.

L12: Realistic Models of the Housing Market

https://sites.google.com/site/economicsislamicapproach/ll12-realistic-s-d-models

Some experimental games were played to show students how real supply and demand works in the real world, very differently from the textbooks. My students may ask you to arrange for a time to play these games outside of regular class hours.

Insha Allah, I will be back for the lecture on Tuesday Jan 2nd.