Economic Model
Definition
An economic model is a simplified representation of complex economic processes or relationships. These models use mathematical equations to predict outcomes based on different variables.
Analogy
Imagine you're trying to bake cookies without knowing the exact recipe. You know some ingredients but not all nor their quantities. So you start experimenting by changing one ingredient at a time while keeping others constant (ceteris paribus). That's what economists do with economic models; they change one variable at a time while holding others constant to understand how changes affect outcomes.
Related terms
Microeconomics: The study of individual units within an economy such as households and businesses.
Macroeconomics: The study of the economy as a whole including topics like inflation, unemployment, and economic growth.
Econometrics: The application of statistical methods for testing hypotheses or theories in economics.
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