Explain what is meant by the term an Economic model

A detailed Summary of Explain what is meant by the term an Economic model

Explain what is meant by the term "an economic model" and outline a model of price and output determination in a free market. Examine the effect of a change in real disposable income on equilibrium price and output.

An economic model or theory is a simplified explanation and analysis of economic behaviour. It allows us to predict, and therefore intervene, if we do not like the outcome of a possible chain of events.

Theories and models are mainly derived from past responses to similar stimuli or from statistical surveys, and this information may not always be accurate as it assumes ceteris paribus, or all other things remaining equal. For example, figures may show that the number of people smoking doubled when the price of cigarettes halved in the 1960's. This does not mean to say that following a similar price reduction today, the response would be the same, as advertising has increased the awareness of the dangers of smoking. Such a difference in behaviour patterns can be explained when we consider that economics is a social science, concerned with people, who have a free will and cannot be made subject to laws. This also explains why many models are generalised, dealing with trends in economic behaviour rather than the choi

This is a model of price and output determination in free market.

Where Qd is quantity demanded, it is a function of the price of the good(Pn), income(Y), the price of all other goods(P1,...Pn-1), and all other factors(T). This is expressed,

Disposable income is income minus tax and National Insurance contributions. Your real disposable income is the purchasing power of your disposable income, i.e.; what one pound will buy you. A change in income will only affect the consumer, so the factor that changes is quantity demanded. Non-specifically, an increase in real disposable income, ceteris paribus, tends to increase the quantity demanded at any given price. The demand curve shifts outwards and there is movement along the supply curve, indicating an expansion in quantity supplied. The point at which the curves cross changes and a new equilibrium price is set. More is supplied and demanded at the higher equilibrium price. Output increases at any given price.

These explanations assume ceteris paribus, that the relationship between real disposable income and quantity demanded/supplied is directly proportional. The models are also generalised and do not account for inferior goods for which demand is inelastic.

Some common words found in the essay are:
, Salmon Prices, National Insurance, PnPn-1T Similarly, equilibrium price, disposable income, real disposable income, price output, real disposable, costs production, equilibrium price output, supply demand, quantity demanded, ceteris paribus, demand supply, price demand, change real disposable, quantity supplied curves, determined supply demand,

Approximate Word count = 1246
Approximate Pages = 5 (250 words per page double spaced)

Category: Miscellaneous

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Explain what is meant by the term an Economic model

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