Economic Model – its definition and properties.
A model is a picture of reality. It can be said that a model is a simplified representation of a real situation. This means that a model must include the main features of the real situation which it represents.
We also make assumptions based on a model so that the assumptions in any particular case are chosen carefully so as to be consistent to retain as much realism as possible and to attain a reasonable degree of generality. There are two basic properties of a model which are
- Analysis
- Prediction
Analysis implies the explanation of the behaviour of economic units. i.e. Â Producers or Consumers. From a set of assumption, we derive certain laws which describe and explain with an adequate degree of generality the behaviour of consumers and producers.
Prediction implies the possibility of forecasting the effect of changes in some magnitude in the economy. For example, a model of supply might be used to predict the effects of the imposition of taxes on the sales of firms.
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