Economy presentation

1. Economic models
Mathematical presentation of economic
theories designed to show the relationship
among variables
 show relationships between variables
explain the economy’s behavior
devise policies to improve economic
performance

2. Variables
The values of endogenous
variables are determined in the
model and are model’s output
 The values of exogenous
variables are determined outside
the model and serves as model’s
input
Model
Exogenous
variables
Endogenous
variables

3. A multitude of model
 No single model can address all the issues
 Our supply-demand model can tell us how a fall in aggregate
income affects price & quantity but cannot tell us why aggregate
income falls

4. Equilibrium and Disequilibrium
Equilibrium
 A situation in which nobody has any immediate
reason to change their actions temporarily.
 This is a state of balance between opposing
actions

5. Contd…
 In Microeconomics, the simplest form of
equilibrium analysis looks at a single market
 The intersection of demand and supply
gives an equilibrium price

6. Contd…
 In Macroeconomics, equilibrium refers to the point at
which all economic factors within a particular product
,industry or market as a whole reach an optimum
balance between supply and demand
 In macroeconomic equilibrium, AD and AS curve
intersect each other

7. Contd…
Disequilibrium
 A situation in which plans can not be
carried out
 Disequilibrium can arise in particular
markets, in the level of activity as a whole,
or in the external relations between
countries
 It is the normal state of the real world
economy

8. Value added
 The value of its output minus the value of
the intermediate goods the firm used to
produce that output
Value added does not comes by itself
It needs changes over the bought materials
The changes in the materials are brought
by labor, capital, government policies and
other factors of production