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Outline how the following tools are used in economics.
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An economic model is a simplified version of reality that allows us to observe, understand, and make predictions about economic behavior.
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We take a complex real -world situation and par it down to the essentials.
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We can give the analyst a better understanding of the situation than any related problems.
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Here's an example of a circular flow diagram.
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This shows the economy consists of two groups, households, and firms.
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These interact in two markets.
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The goods and services market, which firms sell and households buy and the labor market, which households sell labor to business firms and other employees.
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So you can see that through this circular flow diagram, we can show that firms are going to provide wages, salaries, and benefits, and goods and services to households.
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Households will provide labor and payment for goods and services to firms.
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An economic equation is economic identity using a math equation.
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So for example, we have the equation of exchange that shows a relationship between money supply, the velocity of money, the price level, and an index of expenditures.
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So here we have m times v is equal to p times t, where m is the money supply, b is the velocity of money, p is the average price level of goods during the year, and t is an index of the real value of aggregate transactions...