A production function formally defines the relationship between the quantity of inputs utilized in a production process and the resulting amount of output. This connection can be represented either through a mathematical equation or visually as a graph. For example, in an agricultural setting where inputs are labor and land, if the amount of land is held constant, the production function can be plotted on a graph. This graph would show the variable input (e.g., number of farmers) on the horizontal axis and the total output (e.g., grain produced) on the vertical axis.

Production Function

A factor of production refers to any input utilized in the creation of goods or services. Key examples of these factors include labor, land, capital (which encompasses machinery and equipment), energy, and various raw materials.

Google

An economics model is a simplified representation of the economy that helps us understand how millions of people's decisions affect each other's behavior. As it is impossible to describe every detail of how individuals act and interact, models allow us to stand back and look at the big picture. Effective models are created by including the essential features of the economy that are relevant to the question we want to answer while ignoring unimportant details. Economic models frequently employ mathematical equations, graphs, words, and pictures. 






Economic Model

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

- Economics in Society and Biosphere
- Parts and Development of the Capitalist System
- Model of Households and Firms
- Irving Fisher's Physical Model
- Malthusian Model
- Technology and Cost Models
- Innovation and Profits Models

Economics Models

To understand how the economy works, economists often create models that simplify and capture the essential elements of the economy. They use these models to investigate how changes in economic conditions affect prices and other economic variables. For instance, they may simulate the effects of an increase in the supply of a good on its price and the prices of other related goods. By conducting experiments with the model, they can observe how changes in one part of the economy can affect the rest of the system.

How Economic models are Used

A self-perpetuating model outcome where an object of interest remains unchanged until acted upon my an outside force. Equilibrium in a model signifies that one or more elements remain unchanged. This does not mean that there are no changes occuring.

Equilibrium in an Economic Model 

General steps to building an economic model
- Make a simple description of conditions in which people act
- Describe what determines peoples actions in the scenario
- Observe how each persons actions interact with others
- Determine the outcome of these interactions (often equilibrium effect)
- Try to obtain insight by observing how things are affected by changes in some variables

Building Economic Models

- *Ceteris paribus⁠*
- Incentives
- Relative Prices
- Economic Rent

Learn Before

Related

Learn After