What is the difference between economic theory and economic model?
Sometimes economists use the term theory instead of model. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. Often, models are used to test theories.
Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is more applied or empirical representation. Models are used to test theories, but for this course we will use the terms interchangeably.
In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed to illustrate complex processes.
An example of an economic model is the Production Possibility Frontier by Gottfried von Haberler. The model illustrates the opportunity cost tradeoff between the production of two goods. As the production of one increases, the production of the other decreases.
There are four types of models used in economic analysis, visual models, mathematical models, empirical models, and simulation models.
Economic theory is based on the assumption that investors and consumers are rational and very “efficient machines,” namely, that they make the best choices for themselves. Laboratory tests reveal that investors' behavior is much more complicated relative to the behavior assumed in most economic theories.
Economic theories try to explain economic phenomena, to interpret why and how the economy behaves and what is the best to solution - how to influence or to solve the economic phenomena.
Theories are plausible explanatory propositions devised to link possible causes to their effects. Generally, models are schematic representations of reality or of one's view of a possible world, constructed to improve one's understanding about the world and/or to make predictions.
Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem.
Model is a verbal or a visual representation of a concept. Theory is used to explain things and is less practical. Model is used to simplify things and is more practical. Theory explains a phenomenon and is intangible.
What are the main characteristics of economic models?
This essay describes the seven key properties of useful economic models: parsimony, tractability, conceptual insightfulness, generalizability, falsifiability, empirical consistency, and predictive precision. of these properties, although almost no economic models have them all.
Models are used for two main purposes: simulating (e.g. how would the world change relative to some counterfactual if we assume a change in this or that variable) and forecasting (e.g. what the world might look like in 2030).
Formal versus Informal Models. Physical Models versus Abstract Models. Descriptive Models. Analytical Models.
Econometric models are statistical models used in econometrics. An econometric model specifies the statistical relationship that is believed to hold between the various economic quantities pertaining to a particular economic phenomenon.
The 3 major theories of economics are Keynesian economics, Neoclassical economics, and Marxian economics.
What is an economic model? By an economic model for production planning we mean a system of equations and inequalities which relates outputs and inputs, and their associated costs.
This essay describes the seven key properties of useful economic models: parsimony, tractability, conceptual insightfulness, generalizability, falsifiability, empirical consistency, and predictive precision. of these properties, although almost no economic models have them all.
