What are Economic Models and why do we need them?

Economists love economic models!

An Economic Model is a simplified version of the ''real world" that can be used to explain, analyse and predict complicated economic systems. Examples of economic models that we study on our course include:

•               Demand and Supply curves

•               The Circular Flow of Income

•               The Production Possibility Curve

 

The real world is a very complicated place, and even the smartest people in the world cant predict the future! For example, most of the worlds richest and smartest people never predicted the recent Global Financial Crisis.

Economic models help up to explain, analyse and predict complicated 'real world' behaviour. Even though models didn't prevent the Global Financial Crisis, Governments did use them to plan for the world’s