Models in Economics

Of course, the real world of economics is very complex. The allocation of resources in a market economy is the result of the interaction of thousands of decisions made by each of hundreds of millions of individual people. Economics deals with this complexity in part by thinking in terms of "models."In a modern economic system, individuals, companies, markets and even nations are interdependent. A model (of a particular subsystem of the economic system) is a description of these interdependencies in terms of mathematics, pictures, a computer programming language, or some similar descriptive language, together with a theory of the dynamics of the subsystem. Dynamics is the way the subsystem evolves as time passes.

Models are usually somewhat more complex than theories, and a theory may be just one part of a model. Like theories, however, models are abstract, and must ignore some aspects of the system they describe. The term "model" is sometimes used in two different ways. The most common usage in economics can be expressed as "a model of." This is the usage just described: a "model of" is descriptive. However, we may also hear of a "model for," as in "the economy of Taiwan provides a model for all of China to emulate." In economics, "model of" is the primary meaning, and nothing more will be said here about "models for."

In economics, a model is most likely to take the form of a list of variables and one or more relationships among the variables. These variables and relationships describe the interdependence among the people and activities in the economic system or subsystem, and the way these activities change as time passes. Examples serve best to make this clear. In the next few sections, we will illustrate this approach by discussing a model of a very basic economic concept, the concept of "scarcity." This model is one we use in discussing the allocation of resources, so we will come back to it in studying microeconomics, and it will illustrate the key role of allocation of resources in modern economics, as well as giving an example of economic models.

Scarcity