Many models are used when teaching and studying economics. These models can be very basic or complex depending on contributing factors. Models are used to demonstrate both macro and micro economic formulas and theories.
Demand Curve
The most basic model used in economics is the demand curve. This model shows the effect that demand of a product or service has on the price of the product or service. The idea behind the demand curve model is that when the demand for something increases, so does the price. Similarly, the demand curve also shows a decrease in pricing when demand for a product or service goes down. The demand curve model can also show shifts in demand caused by many factors, including changes in customer preferences, income of potential buyers and expected price fluctuations.
Supply Curve
The supply curve is also a basic model used in economics. This model shows the effect that supply of a product or service has on the price of the product or service. The idea behind the supply curve model is that when the supply of something increases, the price decreases. If the supply of something goes down, the price goes up according to the supply curve. The supply curve can show shifts according to many factors, including changes in product price, number of sellers and technology.
Supply and Demand
The supply and demand model used in economics combines the demand and supply curves to demonstrate the effect supply and demand have on one another. The idea behind the supply and demand model is that there is one single point in which the demand for a product or service is equal to the supply of the product or service. At this point, the supply curve intersects the demand curve. Below this intersection on the model lies an area in which there is a shortage of a product or service. Above the intersection is an area that shows a surplus of a product or service. A shift in the supply and demand model can occur when there is either a positive or negative shift in the demand or supply factor.
Production Possibility Curve
The production possibility model used in economics is based on the idea of two products or services being offered simultaneously in the same area. The production possibility curve shows the maximum number of a certain product that can be produced if another product is being produced at the same time. The more of one product made, the less the other product can be supplied at the same time. If an economic community decides to make less of both products, they will be operating below their capacity and this point can be found below the production possibility curve. Any point above the curve is impossible for an economic community to reach without an increase in supplies or labor because it exceeds the community's capacity to produce.
Comparative Advantage
The comparative advantage model shows the effect of both trading and specialization on supply of a product or service. This model is usually used to compare two different communities. If the communities trade supplies and provide a service or product for one another, more of each community's service or product will be able to be made and more profit will be generated. Also, if a community specializes in a certain trade area, and supplies the other community with its specialized product, both communities will benefit according to this model. Opportunity cost is also addressed by this model, determining not only the amount of money an item will take to make, but also what opportunities will be given up by producing a certain amount of a product.
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