Microeconomics: Theory and Applications with Calculus, 4e

1.2 Models

Everything should be made as simple as possible, but not simpler.

—Albert Einstein

To explain how individuals and firms allocate resources and how market prices are determined, economists use a model: a description of the relationship between two or more variables. Economists also use models to predict how a change in one variable will affect another variable.

Application Income Threshold Model and China

According to an income threshold model, no one who has an income level below a threshold buys a particular consumer durable, which is a good that can be used for long periods, such as a refrigerator or car. The theory also holds that almost everyone whose income is above that threshold buys the durable.

If this theory is correct, we ...