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AGGREGATE DEMAND CURVE: A graphical representation of the relation between aggregate expenditures on real production and the price level, holding all ceteris paribus aggregate demand determinants constant. The aggregate demand, or AD, curve is one side of the graphical presentation of the aggregate market. The other side is occupied by the aggregate supply curve (which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve). The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect.

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MODEL:

An abstract representation of the real world that is usually based on scientific theories, principles, and hypotheses. A model is used to analyze economic phenomena by focusing on a small number of essential aspects of the real world. It is then manipulated to derive conclusions and implications that can be applied to the real world.
A model is a handy tool that can be used to investigate phenomena, test hypotheses, and analyze alternative events in a simplified, abstract manner. Abstraction is an important feature of any model. A model captures essential features of the real world, but ignores (hopefully) irrelevant details. For economic models, abstraction generally comes in the form of words, graphs, or equations.

An Abstract Model

Market Model
Market Model
Consider, for example, the market. The market model diagram--with price on the vertical axis, quantity on the horizontal axis, a downward-sloping demand curve, and an upward-sloping supply curve--is fundamental to the study of economics. This diagram, however, is not a market itself, but an abstract graphical representation of a market. It is a model.

Suppose this particular diagram is constructed to represent the Shady Valley market hot fudge sundae market. By design, by assumption, the demand curve (D) represents the market demand for hot fudge sundaes by the residents of Shady Valley. The supply curve (S) is then assumed to represent the supply of hot fudge sundaes in the Shady Valley area.

With this configuration in place, this diagram can be used to ascertain the market equilibrium. It can be subjected to comparative statics to see how the equilibrium price and equilibrium quantity are affected by changes in any of the demand or supply determinants. This analysis then can be used to suggest what might happen to the actual price, production, and consumption of hot fudge sundaes in Shady Valley.

However, this diagram is only a model. The real market for hot fudge sundaes does not include any lines or curves. It includes regular people who saunter down to their local ice cream establishment for a freshly prepared hot fudge sundae. It includes the wide range of real world establishments--restaurants, fast-food franchises, street vendors--that make hot fudge sundaes. It includes people buying and consuming. It includes firms producing and selling.

Real World Complexities

Because a model abstracts from the real world, it ignores some real world details and complexities. For example, the good analyzed in the Shady Valley hot fudge sundae market model is hot fudge sundaes. But what exactly is the good traded in the real Shady Valley hot fudge sundae market? That is, what constitutes a hot fudge sundae? Is it a "standard" hot fudge sundae with two scoops of ice cream, three dollops of hot fudge sauce, whipped cream, almond sprinkles, and a cherry on top? What if peanuts are added or the whipped cream is left off? What if frozen yogurt is used rather than ice cream? Does substituting hot caramel sauce for hot fudge sauce make this a different good and a different market? So many possibilities!

When economists create abstract models of the real world, these alternatives need to be considered. Decisions must be made before constructing a model. Perhaps the relevant market is not hot fudge sundaes, but ice cream treats or frozen desserts. How a model is constructed and which real world details are included or ignored is usually determined by what questions economists need answered. If economists are ultimately interested in ice cream sales, then ice cream treats, regardless of topping, is the appropriate model. However, if economists are more concerned with the chocolate industry, then all types of frozen desserts with hot fudge topping are relevant.

Part Science, Part Art

Constructing economic models of the real world is not an exact science. It depends on the questions asked as well as the skills, interests, and even personal biases of the investigators. This suggests that models are occasionally (not always, but occasionally) constructed to achieve desired results. Suppose, for example, that Professor Grumpinkston is against the minimum wage. Give him five minutes and he will have a model that illustrates why the minimum wage is bad. Alternatively, if he is for the minimum wage, he can come up with another model to show why it is so great. The models might differ ever so slightly based on which real world details he chooses to use and which he chooses to ignore.

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Recommended Citation:

MODEL, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 22, 2014].


Check Out These Related Terms...

     | comparative statics | marginal analysis | economic analysis | graphical analysis |


Or For A Little Background...

     | abstraction | scientific method | phenomenon | economic science | world view | political views | theory | data | cause and effect | fallacy of false cause |


And For Further Study...

     | fallacies | normative economics | seven economic rules | economic thinking | four estates | free enterprise | pure market economy | pure command economy | circular flow | market | short-run production analysis | consumer demand theory | utility analysis | business cycles |


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