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## AP®︎/College Microeconomics

### Course: AP®︎/College Microeconomics>Unit 1

Lesson 1: Scarcity

# Economic models

Economic models are a way of taking complicated ideas and events and breaking them down into their most important characteristics. We use models in economics so that we can focus our attention on a few things instead of getting bogged down a lot of details. In this video, learn more about the role that models play in economics, and the importance of the assumptions that underlie those models.

## Want to join the conversation?

• Is Kahn Academy a free resource?
• Yes, did you have to pay when you got on it?
(1 vote)
• Can someone simplify this?
(1 vote)
• The point of this video is that you cannot perfectly predict what everybody does in the economy and therefore simplified models are used.
Some people are willing to pay more than others for something or wont do something although it would be good for them. You can't know every person and know what they're up to. Therefore you cannot fully predict the economy.
Instead you can look what people do on average: If the price for something goes down, more people tend to buy it and vice versa. If the government does this and that, that probably has that effect and so on. You can't predict what every single person will do, but you can get a sense for things by coming up with a simplified model.
Other sciences also use models. You can't predict how every molecule moves, but you can make models that tell you about the average velocity of a molecule and so on.
• I have a few questions related to Solow model. I was hoping someone could answer
What are the four basic results of Solow model and what is the major draw back of this model?
Discuss the validity of the following statement, Unlike Solow's model, Romers model concludes that changes in saving rate do not affect the sustained per capita output growth rate
and
what is the leading economy in the world today? Economist will use two related measures to answer this question, GPD and GPD per capita
Discuss which measure is more important from person's point of view and which better reflects the standard of living? china is experiencing tremendous growth since 1978 and its projected growth is three times more than US growth rate. if china continues to grow at current growth pace it will have larger GDP than US in 2018. Will China be able to close the gap between US in real GDP per capita? what factors can contribute to that? what government policy to promote growth should be used?
• What experiments would "feel fairly unethical to our modern moral ethos" and why does Khan ask it that way? -
• Many examples come to mind, but some examples are studies of infectious disease where people were denied treatment to see how diseases progressed.
• Is economics even a science like the natural sciences? Isn't it fundamentally a social science that makes assumptions about human nature and builds models on those assumptions, and uses them to draw conclusions and make predictions about the real world? Isn't economics different from the natural sciences? And isn't it closer to, say, sociology, anthropology, and political science?
• What exactly do economics models mean? and what do chemistry and biology have to do with economics?
• Macroeconomics studies the aggregate world, and as a direct result, it has to study the decisions of millions and millions of people at once. The problem is that the real world is really weird. People make odd decisions all the time. Because of that, it's really hard to precisely measure economies as a whole, even impossible. That's where economic systems come in.

Economic systems are simply sets of rules that simplify the economy to make it easier to measure. They are assumptions that make it easier to measure the economy. For example, the Production Possibility Frontier (PPF) makes the assumption that, when measuring two variables, all other variables remain equal. That's obviously not how the real world works, but it's approximately correct. Through that approximate data, we can draw conclusions about the real economy. Economic systems help economists measure the unmeasurable.

As to your second question, they were simply using chemistry and biology as examples of what a system is. Those two fields are also complicated, so sometimes scientists will make simplifying assumptions to reach conclusions, just like economics.
• How will bitcoin (blockchain) alter the study of economics?
• At Sal says, "... but economics straddles between a social science and the sciences like chemistry or physics, because you can't run experiments in the same way and we often make simplifying assumptions." This statement surprised me because I thought economics was a social science, not a science. Could anyone explain to me why economics would be considered science?