Economic Models

Read this section on the reasoning behind economic models, which are just representations of reality or theoretical thinking for understanding something. Pay attention to the explanation about the Circular Flow Diagram (Figure 2), which represents how the economy and its actors are related to one another. Make sure to answer the quiz questions.

Try It

The best way to determine the direction and magnitude of the relationship between the price of some good and the demand for it is ________.

    • graphically
    • mathematically
    • by creating a model