1.1.3 The role of economic models

• What are economic models used to analyze, explain, and predict?

  Economic phenomena
• Economic models simplify complex economic processes by abstracting away irrelevant details
• The Production Possibility Frontier illustrates the trade-offs between producing different goods.
• Match the economic model with its key usage:

  Supply and Demand Curves ↔️ Explains equilibrium price and quantity

  Circular Flow Diagram ↔️ Illustrates economic interconnectedness

  Game Theory ↔️ Predicts competitive behavior
• What is one way economic models help economists understand complex systems?

  Simplify and visualize relationships
• What does the ceteris paribus assumption hold constant in economic models?

  All other factors
• Mathematically, utility maximization can be represented as $U =$$f(x, y)$, where $U$ is utility and $x$ and $y$ are goods consumed
• What is a limitation of economic models in predicting trends?

  Oversimplification
• The Keynesian Aggregate Expenditure Model is expressed as $AE =$$C +$$I +$$G +$$(X - M)$, where $AE$ stands for Aggregate Expenditure
• In the Keynesian Aggregate Expenditure Model, what does $(X - M)$ represent?


  Net Exports
• Economic models are essential tools for economic analysis and policy-making.
• What is the purpose of economic models according to this study material?

  Analyze, explain, and predict
• Steps in using economic models for forecasting outcomes

  1️⃣ Identify key variables

  2️⃣ Develop model assumptions

  3️⃣ Analyze relationships

  4️⃣ Forecast trends
• Match the model type with its key characteristic:

  Production Possibility Frontier ↔️ Illustrates opportunity cost

  Supply and Demand Curves ↔️ Explains market equilibrium

  Circular Flow Diagram ↔️ Shows economic interconnectedness

  Game Theory ↔️ Analyzes strategic interactions
• Economic models help economists understand complex systems, forecast trends, and evaluate the impact of policies
• Economic models are solely mathematical and cannot be expressed verbally or graphically.

  False
• What does the Production Possibility Frontier illustrate in economics?

  Opportunity cost and efficiency
• Supply and Demand Curves are used to explain equilibrium price
• Which economic model analyzes strategic interactions between individuals or firms?

  Game Theory
• What are the primary purposes of economic models?

  Analyze, explain, predict
• Economic models help economists understand relationships between variables
• What does the Production Possibility Frontier (PPF) illustrate?

  Trade-offs between goods
• Supply and Demand Curves explain the equilibrium price and quantity
• What does the Circular Flow Diagram show?

  Flow of goods and money
• Game Theory analyzes strategic interactions between firms or individuals.
• Match the purpose of economic models with their primary function:

  Understand complex systems ↔️ Simplify relationships between variables

  Predict future outcomes ↔️ Forecast trends based on assumptions

  Develop policy recommendations ↔️ Evaluate the impact of different policies
• What are the three primary purposes of economic models?

  Analyze, explain, predict
• The Production Possibility Frontier (PPF) illustrates trade-offs between producing different goods
• What do supply and demand curves explain in economics?

  Equilibrium price and quantity
• The Circular Flow Diagram shows the flow of goods, services, and money between households and firms.
• What does Game Theory analyze in economics?

  Strategic interactions
• The Keynesian Aggregate Expenditure Model is represented as $AE =$$C +$$I +$$G +$$(X - M)$, where $AE$ stands for Aggregate Expenditure
• Which economic model demonstrates opportunity cost and efficiency?

  Production Possibility Frontier
• The rationality assumption in economic models assumes agents make decisions to maximize utility or profit.
• The assumption of ceteris paribus means that all other factors are held constant
• What are economic models used to focus on in complex economic systems?

  Most important factors
• Match the economic model with its description:

  Production Possibility Frontier ↔️ Trade-offs between goods

  Supply and Demand Curves ↔️ Market interactions

  Circular Flow Diagram ↔️ Flow of money
• Which economic model shows opportunity cost and efficiency?

  Production Possibility Frontier
• The Production Possibility Frontier (PPF) demonstrates opportunity cost and efficiency
• What does Game Theory predict in competitive situations?

  Behavior