economic model


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economic model

a construct or model incorporating two or more variables that:
  1. describes the relationship that exists between the variables;
  2. depicts the economic outcome of their relationships;
  3. predicts the effects of changes in the variables on the economic outcome.

Economic models are used to summarize the essential characteristics of complex economic phenomena in order to simplify them and render them amenable to analysis. This normally requires the model-builder to make certain simplifying assumptions about human behaviour. For example, in order to analyse demand, economists assume that consumers seek to maximize their satisfaction (utility) and that they will rationally consume more of a product the price of which has fallen, and vice-versa.

There are numerous economic models portrayed in this book; for example, EQUILIBRIUM MARKET PRICE, EQUILIBRIUM MARKET PRICE (CHANGES IN), EQUILIBRIUM LEVEL OF NATIONAL INCOME, MULTIPLIER.

See alsoECONOMETRICS, HYPOTHESIS TESTING, ENDOGENOUS VARIABLE, EXOGENOUS VARIABLE.

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