Lecture 1 - Introduction Flashcards
What is an economic model?
a mathematical representation of a hypothetical world that we use to study economic phenomena
What is a parameter?
an input that is fixed over time, except for when the model builder changes it for an experiment
What is an exogenous variable?
an input that can change over time but determined ahead of time by the model builder (outside the model)
What is an endogenous variable?
an outcome of the model, something that is explained by the model (within the model)
What assumption is associated with market clearing?
the assumption that prices are flexible and adjust to equate supply and demand
When are prices described as ‘sticky’? And what does this mean?
- in the short-run
- means that they adjust only sluggishly in response to supply and demand imbalances
Give a real-life example of where sticky prices are seen
labour contracts usually fix the nominal wage for at least a year
When prices are sticky (in the SR) supply will not always equal demand, leading to an excess supply or demand. Give a real life example of where this is seen.
unemployment shows excess supply of labour, and wages are sticky in the SR, so cannot respond quickly
When are prices described as flexible?
in the long-run
