Model building

• Economic model 


  An economic model is a simplified representation of reality used to provide insight into economic decisions and events…
• What is economic activity like?

  Vast and dynamic
• Why do economists use models?

  Models are used to predict what is likely to

  happen or describe and explain what has

  happened. They are static representations of a dynamic reality- models built with different variables
• Economic Variables

  factors used in a model - less factors = simple
• CETERIS PARIBUS


  applied to economic models to enable dynamic

  situations to be represented in static models.

  It enables us to look at the consequences of changing that one variable whilst keeping all other variables fixed.
• More will be demanded when price falls, CETERIS

  PARIBUS - Law of Demand
• How are good economic models built?


  Using accurate and reliable data

  Relaxing Ceteris Paribus so that other factors are introduced into the model- more dynamic. Computerisation of models
• To make a model, economists make assumptions i.e. ceteris paribus