# 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