A mathematical economic model will consist of a system of equations, which may be definitional, behavioral, or in the nature of equilibrium condition. The behavioral equations are usually in the form of functions, which may be linear, or nonlinear, numerical or parametric, and with one or many independent variable(s).
In solving an analytical problem, the first step is to select the appropriate variables - exogenous (variables which are assumed to be determined by forces external to the model) as well as endogenous (variables whose solution we seek from the model) - for inclusion in the model. Next, we must translate into equations the set of chosen analytical assumptions regarding the human (e.g., aggregate consumption pattern in relation to national income), institutional, technological (e.g., production function), legal (e.g., tax structure), and other behavioral aspects of the environment affecting the working of the variables. Only then can we attempt to derive a set of conclusions through relevant mathematical operations and manipulations and to give them appropriate economic interpretations.
The next post (Post 7) on partial market equilibrium would give an example of these steps and how they are used to solve an economic model.
In solving an analytical problem, the first step is to select the appropriate variables - exogenous (variables which are assumed to be determined by forces external to the model) as well as endogenous (variables whose solution we seek from the model) - for inclusion in the model. Next, we must translate into equations the set of chosen analytical assumptions regarding the human (e.g., aggregate consumption pattern in relation to national income), institutional, technological (e.g., production function), legal (e.g., tax structure), and other behavioral aspects of the environment affecting the working of the variables. Only then can we attempt to derive a set of conclusions through relevant mathematical operations and manipulations and to give them appropriate economic interpretations.
The next post (Post 7) on partial market equilibrium would give an example of these steps and how they are used to solve an economic model.
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