Economic Model:
A model is a simplified representation of a real situation.A model implies abstraction from reality which is achieved by a set of meaningful and consistent assumptions,which aim at the simplification of the phenomenon that the model is designed to study. Abstraction does not imply unrealism, but is a simplification of reality.
Economic theory aims at the construction of models which describe the economic behavior of individual units and their interactions which create the economic system of a region.
There are two main purposes for which a model is built -
1.Analysis- implies the explanation of the behavior of economic units, consumers or producers.
2.Prediction-implies the possibility of forecasting the effects of changes in some magnitudes in the economy.
The validity of a model may be judge on several criteria. It's predictive power, the consistency and realism of its assumptions, simplicity.
Milton Friedman- Predictive performance is more important
Paul Samuelson- realism of assumptions and power of the model in explaining the behavior of economic agents, is the most important.
what is the most important attribute of a model depends on its purpose, the use to which one puts the model.
Predictive performance is important when the purpose of the model is forecasting the effects of a certain change in a variable.
Realism of assumptions and explanatory power are important features of a model if the purpose of the model is the explanation of why a system behaves as it does. Ideally a model should fulfill both criteria.
Reference;
1.A. Koutsoyiannis, Modern Microeconomics
Thankyou...
Anurag Educational Academy
A model is a simplified representation of a real situation.A model implies abstraction from reality which is achieved by a set of meaningful and consistent assumptions,which aim at the simplification of the phenomenon that the model is designed to study. Abstraction does not imply unrealism, but is a simplification of reality.
Economic theory aims at the construction of models which describe the economic behavior of individual units and their interactions which create the economic system of a region.
There are two main purposes for which a model is built -
1.Analysis- implies the explanation of the behavior of economic units, consumers or producers.
2.Prediction-implies the possibility of forecasting the effects of changes in some magnitudes in the economy.
The validity of a model may be judge on several criteria. It's predictive power, the consistency and realism of its assumptions, simplicity.
Milton Friedman- Predictive performance is more important
Paul Samuelson- realism of assumptions and power of the model in explaining the behavior of economic agents, is the most important.
what is the most important attribute of a model depends on its purpose, the use to which one puts the model.
Predictive performance is important when the purpose of the model is forecasting the effects of a certain change in a variable.
Realism of assumptions and explanatory power are important features of a model if the purpose of the model is the explanation of why a system behaves as it does. Ideally a model should fulfill both criteria.
Reference;
1.A. Koutsoyiannis, Modern Microeconomics
Thankyou...
Anurag Educational Academy
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