Chapter 1 · Preparation
Economic Models & Algebra
Parameters, endogenous variables, equilibrium, and stock-flow equations.
What you will learn
- Solve a market equilibrium
- Evaluate a parameterized model
- Relate a stock to its flows
Reasoning habits that help
- An equilibrium value is found by imposing the equilibrium condition, then solving the resulting equation.
- Variables can change within the model; parameters are treated as fixed for a particular calculation.
- A stock is measured at a point in time; its change is determined by flows measured per unit of time.
Where economists use these methods
- Economists use market equilibrium equations to predict the price and quantity at which buyers' and sellers' plans agree.
- Linear models represent relationships such as how consumption changes with income or how demand changes with price.
- Stock-flow identities track inventories, wealth, debt, capital, and other economic quantities that accumulate over time.