ECONOMICS MODELS

Economic Models:

Economic theory aims at the construction of models which describe the economic behavior of individual units( consumers, firms, government agencies  and their interactions which create the economic system of a country.

A model is a simplified representation of a real situation. it includes the main features of the real situation which it represents. A model implies abstraction from reality which is achieved by a set of meaningful and consistent assumptions, which aim at the simplification of the phenomenon or behavioral pattern that a model is designed to study.

A model can be constructed at different levels of aggregation and sophistication depending on its purpose. There are two purposes to built a model:

1. Analysis

Analysis implies the explanation of the behavior of economic units, consumers and producers. From a set of assumptions we derive certain "laws" which describe and explain with an adequate degree of generality the behavior of consumers and producers.

   2.  Prediction

Prediction implies the possibility of forecasting the effects of changes in some magnitudes in the economy. For example, a model of supply might be used to predict the effects of imposition of a tax on the sales of firms.

The validity of a model may be judged on several criteria. Its predictive power, the consistency and realism of its assumptions  the extend of information it provides , its generality (that is, the range of cases to which it applies). and its simplicity.