Neoclassical Economic Theory

1. Question: 1.Economic Models are False and so Government should ignore theair Predictions Explain ,Discuss and Evaluate the Accuracy of this Statement ? 2.Explain, Provide Full Citations for the Employed Literature ? Answer : 1. In economics, a model is described as a theoretical construct that represents theoretical construct of economic procedures by a set of variables as well as set of logical relationships between them. Provably impractical assumptions are invasive in neoclassical economic theory and those assumptions are innate by simplified models for that theory. The modern economy is considered as an intricate machine. The major job is to allocate inadequate resources as well as distribute output among several agents such as individuals, governments and firms. The measurable signals that suggest there is order driving the complexity is mostly emitted by economies while allocating goods and services (Lao, Ellis Christofides, 2014). In other words, the annual productivity of highly developed economies swings around an upward trend. An economic model is a straightforward explanation of reality, intended to capitulate hypotheses about economic performance that can be tested. However, all economic models are subjective estimates of reality that are intended to describe observed occurrence, no matter how intricate it is. The government should ignore their predictions, as the predictions are tempered by the arbitrariness of the fundamental data that seeks to describeand by the validity of the theories used to obtain its equations. No economic model provides an ideal explanation of reality. The major reason for this is inadequate attention to the links between overall demand, wealth as well as excessive economical risks (Varian, 2016). According to reports, there will be considerable research into exposure as well as understanding the lessons from the crisis. The research will in turn add new behavioural equations to present economic models. The economic models also necessitate modifying existing equations to link them to the new equations modelling the financial sector. The true test of the improved model will be its capability to constantly flag levels of economic risk that require a preventative policy response. Economists make the use of tools in order to test their models that include case studies and statistics. The major flaws deals with effectual market hypothesis as well as logical expectations hypothesis. Most of the economists assume that market actors not only behave rationally but they also behave according to the identical mental models that are deployed by economists. Most of the economic models also falls prey to what is termed as physics envy (Rabin, 2013). Keynes illustrated the fact that economic s is essentially a moral science. In other words, an individual can argue that the Nobel Prize for economics belongs somewhere between those for physics, literature and peace. 2. Price elasticity mostly measures the effect of price change on demand. It is defined as the percentage change in consumption in response to 1 percent change in price. The responsiveness of quantity demanded to a change in price is measured by the price elasticity of demand, with all factors held constant. The results are mostly unit less number as the calculation makes the use of proportionate changes. It also does not rely on the units in which the price and quantity are expressed (Thimmapuram Kim, 2013). In other words, P1 = Initial price per pack of cigarettes Q1 = Total packs of cigarettes that are sold at price P1 P2 = New price per pack of cigarettes Q2 = Total packs of cigarettes that are sold at price P2 As a result, the price elasticity of demand for cigarettes will be: Price Elasticity of Demand = In the case of tobacco products, the elasticity of price is mostly less than 1 and the demand for tobacco is price inelastic (Coglianese et al., 2016). It indicates that when price rises, the consumption of tobacco decreases by a less significant percentage as compared to increase in price. A price of -0.4 illustrates the fact that when price rises by 10 percent, demand decreases by 4 percent in a rational period of time that facilitates the individuals to adjust that tobacco use behaviour. In other words, Ed = 0 that is also referred to as perfectly inelastic. On the other hand, the demand for pizza tends to be elastic. The PED of the pizza indicates that a negligible change in price leads to an enormous increase in the demand for pizza. In this case, E = 1 where the product has unitary elastic demand under which the total revenue is not affected by negligible changes in price. In order to make more inelastic, the pizza company are likely to market more healthy and required fast foo d by introducing new products (Koh, Lee Choi, 2013). Gasoline has a relatively inelastic demand because; changes in prices have negligible impact on demand. In other words, there are few substitutes for gasoline, and as a result, the consumption of gasoline can lead to reduction of consumption of another product. With gasoline, an individual opts for public transportation instead of driving however; that is dependent on public transportation being available. Without obtainable substitutes, the demand for gasoline is likely to remain stable (Levin, Lewis Wolak, 2016). References Coglianese, J., Davis, L. W., Kilian, L., Stock, J. H. (2016). Anticipation, tax avoidance, and the price elasticity of gasoline demand.Journal of Applied Econometrics. Koh, Y., Lee, S., Choi, C. (2013). The income elasticity of demand and firm performance of US restaurant companies by restaurant type during recessions.Tourism Economics,19(4), 855-881. Lao, L., Ellis, M., Christofides, P. D. (2014). Smart manufacturing: Handling preventive actuator maintenance and economics using model predictive control.AIChE Journal,60(6), 2179-2196. Levin, L., Lewis, M. S., Wolak, F. A. (2016).High frequency evidence on the demand for gasoline(No. w22345). National Bureau of Economic Research. Rabin, M. (2013). An approach to incorporating psychology into economics.The American Economic Review,103(3), 617-622. Thimmapuram, P. R., Kim, J. (2013). Consumers' price elasticity of demand modeling with economic effects on electricity markets using an agent-based model.IEEE Transactions on Smart Grid,4(1), 390-397. Varian, H. R. (2016). How to build an economic model in your spare time.The American Economist,61(1), 81-90.