The Types of Models in Economics

Topics: Economics, Mathematics, Flowchart Pages: 5 (1523 words) Published: October 5, 2010
Types of Models in Economics
From the definition of a model, it has been said that models in economics have the wide range of forms including graphs, diagrams, and mathematical models. Economists use these models in different purposes; it depends on many factors such as what type of raw data they have, how they can represent the data, and what they want from the model they use. In this section it will be more explanation about what is the main role of these different models and also some important examples in economics. Flow Chart

Flow chart is a diagram that shows the connections between the different stages of a process or parts of a system. Economists use a flow chart to explain how the economy is organized and how participants in the economy interact with one another. If people follow the right connections in the flow chart diagram It will be easier for them to understand the relationship between participants in the economy. One of the important flow chart using in economics is called the circular-flow diagram, presented in Figure 1. Circular-flow diagram is a visual model of the economy that shows how dollars flow through market among households and firms.

Graph is a planned drawing, consisting of a line or lines, showing how two or more sets of numbers are related to each other. In general the different types of graphs can be separated by using the number of variables represented in the graph, i.e. graphs of a single variable such as pie graphs, bar graphs, or time-series graphs; graphs of two variables (these variables are represented by the x- and y-coordinate) such as scatter diagrams; and graphs of more than two variables (these graphs are represented by more than 2 coordinates). In economics many kinds of graphs are used: some graphs show how variables change over time; other graphs show the relationship between different variables. So it is important to know what is the difference between these graphs and how to choose the right one to represent observed or interested data. While there are so many different kinds of graph in general meaning, it is better to focus on only the important types of graphs using in economics. The following part is provided more explanation about the main types of graphs in economics including production possibilities frontier (PPF), time-series graph, scatter diagrams, and multicurve diagrams.

Production possibilities frontier or PPF is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. FIGURE 2 Production Possibilities

This figure shows the six possible pairs
of food-machines production levels.
A smooth curve fills in between the
plots pairs of points, creating the
production possibilities frontier.
Scatter diagrams show observations on a pair of variables. In some cases only individual pairs of points will be plotted; in many cases it is normal to find scatter diagrams plotted as the combination of variables for different periods of time (month, year, etc.). An important example of a scatter diagram in macroeconomics is the consumption function. Multicurve diagrams show two or more relationships in a single graph. In many cases only one curve in a graph is not enough to analyze the complicated system of economic problem. Therefore it will be useful to present more than one curve in the single graph in order to see the relationship between these curves. The most important example of the multicurve diagrams is the supply-and-demand diagram, shown in figure 5. Mathematical Model

A mathematical model can be broadly defined as a formulation or equation that expresses the essential features of a physical system or process in mathematical terms. In a very general sense, it can be represented as a functional relationship of the form Dependent variable = f (independent variables, parameters, forcing functions) (1) Where the dependent variable is a...
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