Economic Models and Real Numbers YouTube Lecture Handouts
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Economic Models

Economic theory is an abstraction from real world

Economic model – deliberately simplified analytical framework – just a theoretical framework

Mathematical model – includes set of equations
Variables, Constants and Parameters

Variable – magnitude can change – profit, revenue, cost, national income, consumption, investment

Endogenous variables – solution values we seek form the model (market clearing value of price or profit maximizing level of output)

Exogenous variables – variables determined by forces external to model

Tea and coffee (price of substitute) and price of complement (sugar) – preference and number of buyers (exogenous)

Analysis of market determination of wheat price (variable price is endogenous) but it is exogenous to theory of consumer expenditure

Constant – antithesis of variable and does not change

Constant with variable is known as coefficient of variable

Parameters – resemble exogenous variables (include in model) – like gasoline in demand of automobile included in model
Equations and Identities

Definitional Equations –

Behavioral Equation 

Equilibrium constant 

Definitional Equation – identity between two alternate expressions that have the exact same meaning profit = revenuecost

Behavioral equation – variable behaves in response to changes in other variables

C=75+10Q or C=110+Q^2

Equilibrium constant – model requires a prerequisite for attainment of equilibrium Qd=Qs (demand = supply) – equation of market; saving=investment (equation of national income model)

Real Numbers

Real – rational and irrational (non repeating and non terminating like pie= 3.1415)

Rational numbers include integers and fractions (p/q where q not equal to 0)

Only real numbers are continuous
Manishika