Question

What is the purpose of an economic model? Why do economists make assumptions in developing models?

Answer 1

Economic model is the theoretical representation of an economic process using different variables. It helps to make complex process to understand in a simplified manner using mathematical representation so that we can understand.Every economic model varies in its structure and representation as depending on the study the relationship between variables should be established to make the process useful to us.

Example of economic models : Classic economic model , PPF etc.

The purpose of the economic model is to

1) Collect relevant data and make analysis on it

2) making assumptions so that to simply complexity and make it applicable to real world

3) Basing on the analysis prediction are made along with explaination

4) Check that the prediction made are accurate and these predictions are to made considering the past.

Assumption always make the economic model process simplify and make them easier to study the economists. Assumptions are made basing on the data representation that they collect. Not everytime the assumption will be correct sometimes it may fail also. Economics is a vast ocean where we can't say what will happen as there so many factors should be considered. Economists are always opportunists who will assume that economy will be always in good condition, so they assume that if everything goes good this is how economy will work. So depending on their study in economic model they will predict good or bad.