Record Detail Back
Essentials of Economics
- Share to:
model is any simplified representation of reality that is used to better
understand real-life situations. But how do we create a simplified representation
of an economic situation?
One possibility—an economist’s equivalent of a wind tunnel—is to find or
create a real but simplified economy. For example, economists interested in the
economic role of money have studied the system of exchange that developed in
World War II prison camps, in which cigarettes became a universally accepted
form of payment even among prisoners who didn’t smoke.
Another possibility is to simulate the workings of the economy on a computer.
For example, when changes in tax law are proposed, government officials use tax
models—large mathematical computer programs—to assess how the proposed
changes would affect different types of people.
Models are important because their simplicity allows economists to focus
on the effects of only one change at a time. That is, they allow us to hold everything
else constant and study how one change affects the overall economic
outcome. So an important assumption when building economic models is the
other things equal assumption, which means that all other relevant factors
remain unchanged.
But you can’t always find or create a small-scale version of the whole economy,
and a computer program is only as good as the data it uses. (Programmers have
a saying: “garbage in, garbage out.”) For many purposes, the most effective form
of economic modeling is the construction of “thought experiments”: simplified,
hypothetical versions of real-life situations.
In Chapter 1 we illustrated the concept of equilibrium with the example
of how customers at a supermarket would rearrange themselves when a new
cash register opens. Though we didn’t say it, this was an example of a simple
model—an imaginary supermarket, in which many details were ignored.
(What were customers buying? Never mind.) This simple model can be used to
answer a “what if” question: what if another cash register were opened?
As the cash register story showed, it is often possible to describe and analyze
a useful economic model in plain English. However, because much of economics
involves changes in quantities—in the price of a product, the number of units
produced, or the number of workers employed in its production—economists
often find that using some mathematics helps clarify an issue. In particular, a
numerical example, a simple equation, or—especially—a graph can be key to
understanding an economic concept.
Paul Krugman,Robin Wells and Kathryn Graddy - Personal Name
3rd Edition
13: 978-1-4292-7850-
NONE
Essentials of Economics
Economics
English
Worth Publishers
2014
USA
1-698
LOADING LIST...
LOADING LIST...