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Economic modelschaptern 2

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  • 1. ECONOMIC MODELSChapter 2Alpha Chiang, Fundamental Methodsof Mathematical Economics, ThirdEdition
  • 2. Chapter 2Chapter 2
  • 3. Ingredients of a mathematical model1. set of equations2. variables3. relevant mathematical operations4. derive a set of conclusions which logically follow from those assumptions
  • 4. Variables, constants andparameters Variable: something whose magnitude can change, something that can take on different values ( price, profit, revenue, cost, national income, consumption, investment, imports, expo rts, and so on). Must be represented by a symbol: P, , R. Economic model can be solved to give us the solution values of a certain set of variables.  Endogenous variables: variables whose solution values we seek  Exogenous variables: originates from without.
  • 5. Variables, constants andparameters Constant: magnitude that does not change Coefficient: a constant joined to a variable. eg. 7P ( a constant that is a variable) Parameter: different values can be assigned to a parameter. Normally represented by symbols such as a, b, c, or greek , ,
  • 6. Equations and Identities Definitional equation: sets up an identity between two alternative expressions that have exactly the same meaning. = R-C. Behavioral equation: specifies the manner in which a variable behaves in response to changes in other variables. may involve human behavior : C = 1000 + .75 Y may involve non-human behavior: Q = AX10.5 X20.5
  • 7. Equations and Identities Equilibrium Conditions- an equation that describes the prerequisite for the attainment of equilibrium: Qd =Qs S =I