Explain what is meant by the term “an economic model” and outline a model of price and output determination in a free market. Examine the effect of a change in real disposable income on equilibrium price and output.
An economic model or theory is a simplified explanation and analysis of economic behaviour. It allows us to predict, and therefore intervene, if we do not like the outcome of a possible chain of events.
showed first 75 words of 1275 total
showed last 75 words of 1275 total
supply curve, indicating a contraction in quantity supplied. The point at which the curves cross changes and a new equilibrium price is set. Less is supplied and demanded at the lower equilibrium price. Output decreases at any given price.
These explanations assume ceteris paribus, that the relationship between real disposable income and quantity demanded/supplied is directly proportional. The models are also generalised and do not account for inferior goods for which demand is inelastic.