ECONOMIC MODELS

High school biology teachers teach basic anatomy with plastic replicas of the human body. These models have all the major organs the heart  the liver, the kidneys, and so on. The models allow teachers to show their students in a simple way how the important parts of the body fit together. Of course, no one would mistake these plastic models for a real person. These models are stylized, and they omit many details. Yet despite this lack of realism indeed, because of this lack of realism studying these models is useful for learning how the human body works.

Economists also use models to learn about the world, but instead of being made of plastic, they are most often composed of diagrams and equations. Like a biology teacher’s plastic model, economic models omit many details to allow us to see what is truly important. Just as the biology teacher’s model does not include all of the body’s muscles and capillaries, an economist’s model does not include every feature of the economy.

As we use models to examine various economic issues throughout this book, you will see that all the models are built with assumptions. Just as a physicist begins the analysis of a falling marble by assuming away the existence of friction, economists assume away many of the details of the economy that are irrelevant for studying the question at hand. All models in physics, biology, and economics simplify reality to improve our understanding of it.