Economic model

An economic model is a simplified representation of economic relationships used to explain, analyze, or predict how an economy or part of it behaves. It expresses assumptions and mechanisms in words, diagrams, graphs, or mathematics.

Economic assumption: A premise adopted to simplify or specify an economic analysis. Assumptions define which relationships the model includes and which it leaves out.
Causal mechanism: A sequence of processes through which one factor produces a change in another. Economic models use mechanisms to explain how a shock or policy affects outcomes.
Supply and demand: A framework relating buyers’ demand and sellers’ supply to prices and quantities. It is a compact model of how market prices and traded quantities are determined.
Economic theory: A set of principles explaining how economic choices and interactions produce outcomes. A theory supplies explanatory ideas; a model renders selected ideas into a tractable representation.
Economic variable: A measurable quantity that can change within an economic analysis. Variables represent the quantities connected by the model, such as prices, output, or income.
Economic equilibrium: A state in which economic forces produce no tendency for the modeled quantities to change. Many models solve for the conditions under which agents’ decisions are mutually consistent.
Input-output model: A quantitative representation of transactions among industries in an economy. It traces how production changes in one industry affect others through supplier relationships.
Economic data: Recorded measurements of economic activity, conditions, or decisions. Data describe observed outcomes, while a model organizes relationships that may explain them.
Parameter: A fixed value in a model that shapes relationships between its variables. Parameters determine the strength or form of relationships without changing as variables do.
Comparative statics: The analysis of how an equilibrium changes when a model’s conditions change. It shows how predicted outcomes differ before and after a change in assumptions or policy.

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