Chapter 2, Problem 1CYU

To determine

Two types of economic models used by economists.

Explanation of Solution

Two types of models used by economists are:

Theoretical model: the theoretical model represents the qualitative aspects of an economic situation. Such models seek to derive the relationship between economic variables under the assumption that the agent maximizes an objective subject to well-defined constraints.

Empirical model: the empirical model used to verify the quantitative aspects of an economic situation. For example, there is a positive relationship between expenditure and the level of income. With the help of empirical facts, this relationship over a while can be shown on paper.

Theoretical models are based on simple assumptions while the empirical models are based on various econometrics methods including regression model and time-series analysis. For example, the theoretical model establishes the number of potential outcomes for the examined event, where theoretical probability is the number of potential outcomes divided by the total number of outcomes. Direct or indirect observation of an experience is considered an empirical model, which can be statistically or qualitatively examined by dividing the total number of observed events by the frequency of the event, you can calculate the empirical probability of an event.

Economics Concept Introduction

Economic models are a simplified version of a real-life scenario. Economists used models to represent a complex situation in simple or layman's terms.