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Economic models

In this column, Peter Smith introduces some key economic concepts that you will meet in the early weeks of your course

FERNANDO MADEIRA/FOTOLIA

E conomists often work with models. This is not a reference to beautiful people who work in the fashion industry — it is to do with the way that economists think about the world. The world is a complicated place in which things are constantly changing, people are interacting with each other, and in which events can seem wholly unpredictable. How do economists make sense of all of this? Through building simplified models of reality.

In order to build a model, we first make some simplifying assumptions and then work through the implications of those assumptions for economic behaviour. The model may be — and often is — represented by diagrams that help to analyse how the model works, and to interpret economic behaviour and events. If you go on to study economics at university, you will find that models can also be expressed through mathematics, which helps to increase the complexity of the models and thus move closer to the real world.

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Previous

Why should Greece exit the eurozone?

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Expenditure on the gross domestic product

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