# Economic Models and Real Numbers YouTube Lecture Handouts Part 1

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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 = revenue-cost
- Behavioral equation – variable behaves in response to changes in other variables
- Equilibrium constant – model requires a prerequisite for attainment of equilibrium (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