Model in economics is a mathematical representation, based on economic theory, of a business, a market, or some other entity.

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Model in economics

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Model in English is Model.

Viewing: What is a Model?

A model is a mathematical representation, based on economic theory, of a business, a market, or some other entity.

The model can also be understood as a deliberate simplification of reality. It allows the researcher to ignore the secondary aspects to focus on the main aspect, which is important to the research problem.

For example, the equilibrium output model ignores many factors that affect the economy’s total output, keeping only the large components of aggregate demand, but is very useful for studying the causes of the problem. recession, because in many cases recessions are caused by fluctuations in the components of aggregate demand, especially investment.

### Related terms

Economics is the science that studies how individuals and societies choose to use their scarce resources.

In economics as in other sciences, explanations and predictions are based on theories. Theories developed to explain observed phenomena are based on a series of fundamental rules and assumptions. copy.

### Model Example

We can develop a model of a particular business and use this model to predict how much the quantity of this business’s output will change if the price of raw materials falls, say, by 10%.

Statistics and econometrics also allow us to measure the accuracy of predictions. For example, we predict that a 10% decrease in input prices will lead to a 5% increase in output. Are we sure that the number of products will increase by exactly 5% or can it be between 3% and 7%. Quantifying the accuracy of a prediction is just as important as the prediction itself.

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What is an economic model?

An economic model is a model that links two or more economic variables. Economic models are used for three purposes:

– One is to describe the relationships that exist between economic variables.

– The second is to determine the economic outcomes derived from the relationships of economic variables

– The third is forecasting the effects of changes in economic variables on economic outcomes.