Why do economists make use of simplifications in models?

Economists use simplifications in models to make complex economic concepts and relationships more understandable and manageable.

Economic models are essentially simplified versions of the real world. They are designed to illustrate complex economic relationships and concepts in a way that is easier to understand and analyse. The world of economics is incredibly complex, with countless variables and factors at play. If economists tried to include every single variable in their models, they would become too complicated to be of any practical use. Therefore, they make certain simplifications to keep the models manageable and useful.

For example, in the basic supply and demand model, economists simplify the real world by assuming that there are only two goods, that consumers have perfect information, and that there are no transaction costs. These assumptions are obviously not true in the real world, but they make the model simpler and easier to understand. They allow economists to focus on the fundamental relationship between supply, demand, and price, without getting bogged down in the details.

Moreover, these simplifications also make it easier to make predictions and draw conclusions from the models. By isolating certain variables and relationships, economists can analyse how changes in one area might affect others. For instance, the simple supply and demand model can be used to predict how a change in the price of a good will affect its demand, or how a change in income will affect the supply of a good.

However, it's important to remember that these simplifications are just that - simplifications. They are not perfect representations of the real world, and they can sometimes lead to inaccurate predictions or conclusions. That's why economists often use a range of different models, each with its own set of simplifications, to get a more complete picture of the economic landscape.

In conclusion, simplifications in economic models are a necessary tool for economists. They make complex economic concepts and relationships more understandable, manageable, and useful for analysis and prediction. But they are not without their limitations, and should always be used with an understanding of their inherent simplifications and assumptions.