ECONOMIC MODEL

Nilesh P.Shouche

MBA I

KRS College of Management Studies, Nasik.

Economic Model

An economic model is a mathematical or logical statement of economic theory. It is a method of analysis which presents an over-simplication of the real world. Economic Models can set up with diagrams, words, equation form, etc.

Purpose of Economic Models

Predict & explain behavior Help to generate new ideas

Types of Economic Models

Physical Models Analog Models Symbolic or Mathematical models

Types of Economic Models

Physical Models: - These are sculptures, photographs or visual representation of certain aspects of a system.

Analog Models: - These models are one set of properties represent the other set which the system under study possesses.

Symbolic Models: - In these models the inter-relationships are expressed through mathematical symbols.

Physical Models

Few examples of Physical models are: -

DB-9 pin Connector:

DB-9 pin Connector:

Analog Models

Few examples of Analog Models are: -

Expenses

Food22%

Clothing20%

Education10%

Travelling8%

Household 30%

Taxes5%

Misc.5%

Types Of Symbolic Models

(i) Quantitative Models: - These are based on statistical data.

e.g.

Binomial, Poisson and Normal Distribution.

Types Of Symbolic Models

(ii) Allocation Models: - These are used for finding a solution for optimizing a given objective.

e.g.

Linear Programming, Break-Even Analysis, etc.

Types Of Symbolic Models

(iii) Scheduling Models: - These are used for determining an optimum sequence for performing certain operations.

e.g. PERT, CPM, etc.(iv) Waiting Line Models: - These represents the

random arrival of customers at any point of service.

e.g. Big Bazar, Reliance Fresh, Subhiksha, etc.

Types Of Symbolic Models

(V) Simulation Models: - These are of two types one is Monte Carlo Technique and another is Systems Simulations.

Monte Carlo Technique uses Random numbers, Whereas Systems Simulations uses Historical numbers.

Types Of Symbolic Models

(vi) Inventory Models: - These models help in optimizing inventory levels.

e.g. E.O.Q., ABC Analysis.

Evaluation of Economic Models

Each model is based on a set of assumptions and as a result, a model is an abstraction from reality.

Milton Friedman and many others argue that a model should be judge on its predictive accuracy rather than on how believable its assumptions are.

Advantages of Models

Models transform verbal expressions into scientific expressions.

Standardized terminology. Models are logical. Models lend themselves to proper analysis

and interpretation. The assumptions of a model are stated

clearly.