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What Does 'Economic Model' Mean?

Category: Glossary, Type: Other

The Meaing of Economic Model

The ' economic analysis is based on building models capable to represent in a simplified manner the phenomena and socio-economic reality. In an economic model, inappropriate details are eliminated, to focus on fundamental elements and processes. Like a road map, an economic model must not represent every single aspect in detail, but rather supply an useful guide for interpreting reality. The simplification is therefore the effectiveness of basic economic models. An economic model is a mathematical system composed of exogenous and endogenous variables, capable to represent a sure social phenomenon starting from a sure point of view and from a sure hypothesis of behavior of economic subjects. Each economic model makes assumptions about human behavior. For example, the principle of optimization is widespread in economic analysis, in line with which individuals always select the best way to maximize their well-being or utility. If an individual is capable to rationally select all the possibilities of action, having full information he will 'presumably' select the one able of increasing his pleasure. Other hypothesis underlying economic models is the principle of equilibrium. These two principles are the basis of numerous economic models in history of economic thought. However, they are not always sufficient to adequately represent reality. For example, individuals almost never have all of information in their possession and usually behave irrationally. On the another hand phenomena such as speculative bubbles wouldn't take place. The most advanced economic models assume the principle of optimization and that of equilibrium as orientation aspects, to which all rationally tend without being capable to implement them perfectly.

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Category: Glossary, Type: Other