Model Building & Gains from Trade

Positive vs. Normative Analysis

Positive	Normative
Testable	Opinion
Mentos reacts more in Diet Coke than in Sprite	Diet Coke tastes better with Mentos

Modeling

Models are simplistic but emphasize and highlight key concepts.

Condition of ceteris paribus. Basically, we change only one variable and keep everything else constant when updating models.

We judge models by seeing how well they work in real life.

• Endogenous Variables - internal
• Exogenous Variables - external

$W=f(Education(positive),Age(positiveornegative),Experience(positive),Skills(positive),PleasantConditions(negative),Female(depends))$