Question

4.1

For this discussion forum, begin by reading the following statement and decide whether you agree or disagree with the statement:

“The use of simple models to explain complex economic systems is pointless.”

In a post of several paragraphs, discuss the reasons why you agree or disagree with the above statement. What evidence from the lesson or outside research can you find that supports your stand? How can you connect your argument with the terms and ideas we have studied in this lesson? Include in your post evidence for your stand, especially related to the reasons why economic models are used, assumptions behind economic models, the greater accuracy of more complex models, and the idea that models are often used to focus on one or two factors being studied. Also, consider the example of a model house or model airplane: these might not be “real,” but can we learn anything from these models? How do these models demonstrate the connections and relationships between consumers, producers, and other sectors of the economy?

Answer 1

I disagree with this statement . Let us consider the example of circular flow model . In this model the simple circular flow diagram has two sectors ( household and firms ) and two market ( goods market , factors market ) . The simple model ignores many other injections and leakages in the economy .

Although many other important entities like government , banks etc are eliminated out this simple model yet describes the most important relationships among economic variables . The flow of goods and services in the economy is well depicted along with the flow of money .

Economic models are used to portray a complex economic functioning in a very simple yet effective manner . The assumptions are made to simplify the model and make it more understandable . In the real world the model is not so simple but the essence of the model is same as real world situation .

An economic model is a theoritical construction . A good model will include all relevant variables , and mathematical formulations to set up relations among these variables . The demand and supply diagram is another best example .

With greater complexity the effect of changes in variables becomes difficult to illustrate in a model . The relation among different economic sectors must be as simple as possible in the model to effectively describe the changes in any economic entity .