THE OPEN UNIVERSITY OF KENYA

MODULE TEMPLATE

Programme title Bachelor of Economics and Statistics

Course title BES 121: Introduction to Mathematical Economics

Learning Module number Module 2

Learning module title Introduction to Economic Models

Module Developer Dr. Richard Kiplangat Siele, PhD

Module duration in hours 8

Instructional Hour Equivalent 4

(Divide duration by 2)

Reviewed by

Vision The innovative university for inclusive prosperity

Audience description This module is suitable for learners with little to no prior
knowledge of economics and are interested in gaining a
foundational understanding of mathematical economics. It is
targeted towards learners who seeks to develop an
understanding of how the quantitative economics work in an
economy. The module will be particularly useful for learners
who are pursuing degrees or careers in business, economics,
public policy, or related fields, as well as for anyone who wants
to become a more informed citizen and make better decisions
in their personal and professional lives.

Instructions to learners Welcome to Introduction to Economic Module!

By following these instructions, you can successfully progress

through the module in a timely manner and demonstrate your
understanding of the course material.

Engage with the material: Make an effort to fully engage with

the course material, whether that means taking detailed notes,
participating in online discussions, or seeking out additional
resources to supplement your learning.
 Complete assignments and quizzes thoroughly: Each
assignment and quiz is an opportunity for you to demonstrate
your understanding of the course material. Take the time to
complete each one thoroughly and make sure you have
answered all questions to the best of your ability.

Seek help when needed: If you are struggling with a particular

topic or assignment, don't hesitate to seek help. This may
include reaching out to your facilitator, participating in online
forums, or working with a tutor.

Review and reflect: After completing each assignment or quiz,

take the time to review your work and reflect on what you have
learned. This will help you to identify areas where you may
need to focus more attention in future assignments.

Remember, mastering economic models will prepare you with

knowledge for subsequent intermediate modules. With
dedication and practice, you can develop a strong foundation in
this fundamental area of economic models.

You are encouraged to stay up-to-date with the latest research

and developments on the area of economic models.

Best of luck!

Learning module description This learning module will provide an overview of economic
models, including their types, assumptions, and applications.

The module will begin by introducing the basic concepts and

tools of economic modelling, such as variables, equations, and
graphs. It will then discuss the different types of economic
models, such as microeconomic models, macroeconomic
models, and econometric models.
 Next, the module will cover the assumptions that underlie
economic models, such as rationality, self-interest, and perfect
information. It will explore how these assumptions impact the
accuracy and usefulness of economic models, and how they
can be modified to better reflect real-world conditions.

The module will also provide examples of how economic

models are used in practice, such as to inform policy decisions,
forecast economic trends, and understand the behavior of
individuals and firms. It will highlight some of the limitations and
challenges of economic modeling, such as data availability,
model complexity, and the potential for unexpected outcomes.

Finally, the module will conclude with a discussion of the

importance of economic modeling in modern society, and how
individuals and organizations can use economic models to
make better decisions and improve outcomes.

Module objectives: This module enables learning about;

1. Basic types and ingredients of economic model.

2. Assumptions that underlie economic modelling.
3. Importance of economic modeling in modern society.
4. Economic models in making decisions in real life situations.

Module learning outcomes: By the end of this module you should be able to;

1. Describe the basic ingredients of an economic model.

2. Explain the assumptions that underlie economic model.

3. Apply importance of economic modeling in modern society.

4. Examine economic models in making decisions in real life

situations

Planned Learning Resources Video lectures, online textbooks, interactive simulations, online
discussion forums, practice questions, quizzes and tests, wikis,
webinars, YouTube videos.

ACTIVITY 1: INTRODUCTION Welcome to the introductory lecture on introduction to

economic models!
VIDEO 1: Pre-recorded
lecture on topic emphasizing
LEARNING OUTCOME 1:
In preparation for this module on economic models, it is
Factual knowledge. important to emphasize the relevance of mathematical
economics to everyday life and decision-making. This module
will enable you to have a basic foundation in economic
modeling, and an appreciation for its relevance and significance
in both personal and professional contexts.

Content to be featured in the video: Economic Model is a

simplified representation of complex economic processes or
systems that is used to analyze and predict how these
processes might behave under different conditions. Economic
models use mathematical and statistical techniques to describe
economic relationships and provide a framework for
understanding and interpreting economic data.

In this module, you will use basic mathematics knowledge as

one of the foundations in building and analyzing the economic
models.

Some of the concepts you will utilize in this module include:

Assumptions: Economic models are based on a set of

assumptions about the behavior of individuals, firms, and
markets. These assumptions may simplify the real world, but
they also make it easier to study and understand economic
phenomena.

Variables: Economic models use variables to represent the

different factors that influence economic outcomes. A variable
is something whose magnitude can change, that is, something
that take on different values, for example prices, quantities,
income, costs, and other economic indicators.

Constant: This is a variable that remains unchanged

throughout a given analysis or model. Constants are typically
used to represent fixed parameters that do not vary with
changes in other variables. For example, in a demand and
supply model, the price elasticity of demand may be assumed
to be a constant, which means that the responsiveness of
quantity demanded to changes in price remains the same
regardless of the level of price or other variables in the model.

Parameter: This is a fixed numerical value that is used to

represent a specific characteristic or feature of a model or
economic system. Parameters are distinct from variables, which
can change over time and are often the focus of analysis in
economic models.

Equation: This is a mathematical expression that represents a

relationship between two or more economic variables.
Economic equations are used in economic models to analyze
and predict the behavior of individuals, firms, and markets.

Types of Economic Models

1. Mathematical models: These models use mathematical

equations and statistical techniques to analyze economic
systems.
2. Computable general equilibrium models: These models
simulate the interactions of multiple markets and agents in
an economy.
3. Input-output models: These models analyze the
interdependence of different sectors in an economy by
tracing the flow of goods and services.
4. Game theory models: These models analyze strategic
decision-making in situations where the outcome depends
on the choices of multiple agents.
5. Econometric models: These models use statistical
techniques to estimate relationships between different
economic variables.
6. Agent-based models: These models simulate the behavior
of individual agents in an economy and how their
interactions shape the overall system.
7. Simulation models: These models use computer simulations
to predict the behavior of economic systems under different
conditions.

Assumptions under economic modeling:

1. Rationality: Economic models often assume that

 individuals and firms behave rationally, meaning that they
make decisions that maximize their utility or profits, given
their constraints.
2. Perfect information: Economic models may assume that
individuals and firms have perfect information about prices,
costs, and other economic variables, allowing them to make
optimal decisions.
3. Competitive markets: Economic models may assume that
markets are perfectly competitive, meaning that there are
many buyers and sellers, and no single buyer or seller can
influence the market price.
4. Static analysis: Economic models may assume that the
economy is in a state of equilibrium and that there are no
sudden changes in economic conditions.
5. Homogeneity: Economic models may assume that all
individuals or firms are homogeneous, meaning that they
are identical in their preferences or production capabilities.
6. No externalities: Economic models may assume that there
are no externalities, meaning that the actions of one
individual or firm do not affect the well-being of others in the
economy.
7. Self-interest: Economic models may assume that
individuals and firms act in their own self-interest, rather
than being motivated by altruism or other factors.
8. No transaction costs: Economic models may assume that
there are no transaction costs associated with buying or
selling goods or services.

Significance of economic modeling:

1. Understanding Economic Behavior: Economic modeling

provides a framework for understanding how individuals and
firms make decisions and how those decisions affect the
broader economy. It allows us to identify the factors that
drive economic behavior and to develop theories that
explain those behaviors.
2. Predicting Economic Outcomes: Economic models can help
predict how changes in economic policies, external events,
or market conditions will affect economic outcomes. They
can also help identify the potential unintended
consequences of different policy choices.
3. Evaluating Policy Alternatives: Economic modeling can help
policymakers evaluate the likely outcomes of different policy
alternatives before implementing them. This allows
policymakers to make more informed decisions and choose
policies that are likely to be most effective.
4. Informing Business Decisions: Economic models can be
 used by businesses to make decisions about pricing,
production, and investment. By analyzing the likely
outcomes of different choices, businesses can make
decisions that maximize profits and minimize risks.
5. Facilitating Communication: Economic models provide a
common language and framework for discussing economic
issues. This makes it easier for policymakers, economists,
and others to communicate and work together to solve
economic problems.

ACTIVITY 2: READING Read chapter two on Economic Models page 7-9.

READING MATERIAL 1

Reading Material on Economic Models

(

1. Nicholson, W., & Snyder, C. (2016). Microeconomic

theory: Basic principles and extensions. Cengage
Learning, chapter one: Economic Models, page 3-19.

2. Chiang, A. C. (1984). Fundamental methods of

mathematical economics (3rd ed.). McGraw-Hill. Page
7-9.

After reading this material, attempt the following question:

Quiz:

Why learn economic models?

Answer:

1. Simplifying Complex Systems: Economic systems can be

extremely complex, with many interacting variables and
factors. Economic modeling allows us to simplify these
 systems and focus on the most important variables and
relationships.

2. Making Predictions: Economic models can be used to

predict the likely outcomes of different policies or market
conditions. This allows policymakers, businesses, and
individuals to make more informed decisions.

3. Identifying Key Drivers: Economic models help us to identify

the key drivers of economic behavior and outcomes. This
can help policymakers and businesses to target their efforts
more effectively.

4. Testing Theories: Economic models can be used to test

theories of economic behavior and outcomes. This helps to
advance our understanding of how the economy works.

5. Communicating Complex Ideas: Economic models provide

a common language and framework for discussing
economic issues. This makes it easier for policymakers,
economists, and others to communicate and work together
to solve economic problems.

ACTIVITY 3: Comprehension Questions are based on the lecture and reading material.
questions:
1. What is an economic model?

A. A simplified representation of a complex economic

system.
B. A way to predict the stock market
C. A mathematical equation to solve economic problems
D. None of the above

Answer: A

2. Which of the following is an assumption commonly made in

economic modeling?

A. Perfect information

B. Perfect competition
 C. Rationality

D. All of the above

Answer: D

3. What is the purpose of economic modeling?

A. To make accurate predictions of economic outcomes.

B. To simplify complex economic systems

C. To identify key drivers of economic behavior and

outcomes

D. All of the above

Answer: D

4. Which of the following is a type of economic model?

A. Mathematical equations

B. Graphical representations

C. Computer simulations

D. All of the above

Answer: D

5. What are some of the potential limitations of economic

modeling?

A. Simplifying assumptions may not accurately reflect

reality.

B. Models may not account for all relevant variables.

C. Models may not be able to account for changes in

behavior due to the model itself.
 D. All of the above

Answer: D

6. What is the purpose of testing economic theories with

models?

A. To see if the theory accurately reflects reality.

B. To identify gaps in the theory.

C. To refine the theory and make it more useful.

D. All of the above

Answer: D

7. What is the role of economic modeling in policy analysis?

A. To identify the likely outcomes of different policy

choices.

B. To evaluate the potential unintended consequences of

different policies.

C. To help policymakers make more informed decisions.

D. All of the above

Answer: D

8. What is the purpose of using economic models in business

decision-making?

A. To identify the most profitable pricing strategies.

B. To evaluate the likely outcomes of different investment

decisions.

C. To minimize risks.
 D. All of the above

Answer: D

9. Which of the following is an example of an economic model

used for forecasting?

A. A supply and demand curve.

B. A regression analysis.

C. A time series model

D. All of the above

Answer: C

10. What is the benefit of using economic models to

communicate complex economic ideas?

A. It provides a common language and framework for

discussing economic issues.

B. It makes it easier for policymakers, economists, and

others to communicate and work together to solve economic
problems.

C. It allows for more informed decision-making.

D. All of the above

Answer: D
LEARNING OUTCOME 2: Learner is required to use factual knowledge acquired to
Conceptual knowledge answer question “Why”?

The Case Method, (E-Case or written case) role play or any

other visual aid to be used. An E-Case of a situation for the
learner to solve possible problems using facts acquired.
ACTIVITY 4: Video to be Learners will engage in online discussion either live or on forum
used. to answer ‘Why’ questions.
CASE 1: A Case

In a market, there were women selling onions, vegetables and

other food items. Each one of them sells her food stuff and
keeps the money received in two different pockets. In one
pocket, the money used for buying was kept while on the other
pocket the money received as a profit was kept. At the end of
the day, each woman would count what she had received in
each pocket. Discuss the mathematical economic model which
you could propose for these women other than what they were
using.

Rubrics:

One possible mathematical economic model that could be

proposed for these women is a system of double-entry
bookkeeping. In this model, each woman would keep a record
of all her transactions in a ledger, with each transaction
recorded in two separate accounts: one for the money used for
buying and one for the money received as a profit.

For example, if a woman bought onions for 100 units of

currency and sold them for 150 units of currency, she would
record the transaction in two separate accounts: a debit of 100
units in the "buying" account and a credit of 150 units in the
"profit" account. This would ensure that the woman is able to
track both her expenses and income separately, and accurately
calculate her profit margin.

Moreover, the use of such a model would also allow these

women to analyze their financial performance over time, identify
areas for improvement, and make more informed decisions
about pricing, sourcing, and sales strategies. It could also
provide them with a more structured and transparent way of
keeping track of their finances, making it easier to communicate
with banks or other financial institutions when seeking loans or
other forms of financial support.
ACTIVITY 5: READING Read chapter one page 3-10, in the following text:
MATERIAL
Klein, M. (2013). Mathematical Methods for Economics

(2nd ed.). Cambridge University Press, page 3-10.

After reading this material, attempt the following question:

Quiz:

How do changes in the price of a good or service affect the

quantity demanded, and how can this relationship be
represented graphically using a simple economic model like the
demand curve?

Solution:

1. Explanation of the law of demand: The learner provides a

clear explanation of the law of demand, which states that as
the price of a good or service increases, the quantity
demanded decreases, and as the price decreases, the quantity
demanded increases.
2. Understanding of demand curve: The student demonstrates
an understanding of the demand curve as a graphical
representation of the relationship between price and quantity
demanded. The student should explain how the demand
curve slopes downward from left to right, and how this
reflects the inverse relationship between price and quantity
demanded.
3. Description of factors that shift the demand curve: The
student describes the factors that can shift the demand curve,
such as changes in consumer preferences, income, and the
prices of related goods.
4. Explanation of movement along the demand curve: The
student explains how changes in the price of a good or
service lead to a movement along the demand curve, rather
than a shift of the curve. The student should be able to
explain how a decrease in price leads to an increase in
quantity demanded and a movement down the demand
curve, while an increase in price leads to a decrease in
quantity demanded and a movement up the demand curve.
5. Use of examples: The student should provide clear and
relevant examples to illustrate the relationship between price
and quantity demanded, and how this relationship can be
represented graphically using the demand curve.
6. Overall clarity and organization: The learner presents their
ideas in a clear and organized manner, with a logical
progression from one idea to the next. The writing should be
 free of errors in grammar, spelling, and punctuation.

ACTIVITY 6: ONLINE Make a blog on economic models as a useful tool in any

DISCUSSION economy to succeed in policy making.

Marks will be awarded for contributions made by the learners.

Every contribution is awarded 4mks. Any response to any 3
learners regarding what they have contributed will earn 2 mark
each, hence 6 marks for contribution (Total marks 10marks).

LEARNING OUTCOME 3: Show video which displays practical use of knowledge

PRACTICAL SKILLS acquired.

VIDEO 3:

https://youtu.be/S8hEixdsZBI

.
Watch this video, thereafter attempt the following:

Quiz:

How are the economic models used in the daily life situation in
your country?

Rubrics:

Introduction: Economic models are widely used in many

countries to help individuals, businesses, and governments
make decisions about various economic activities. (2marks)

For example:

Households might use economic models to make decisions

about how to allocate their income between different goods and
services or how to save for the future. (2marks)
 Businesses might use economic models to make decisions
about how much to produce, what prices to charge, and how to
respond to changes in market conditions. (2mrks)

Governments also use economic models to help them make

decisions about policies such as taxation, public spending, and
regulation. For example, economic models might be used to
estimate the impact of a tax on a particular industry or to predict
the effects of a new trade agreement.(2marks)

Conclusion: Overall, economic models provide a way to

simulate different scenarios and predict the likely outcomes of
various decisions. This helps individuals, businesses, and
governments make informed decisions and allocate resources
more efficiently (2marks).

By completing this task, you will be demonstrating an

understanding of the basic types and ingredients of economic
ACTIVITY 7: Learner practice models, assumptions, importance and significance in real world
sessions situations. This task will also encourage critical thinking and
decision-making skills in you.

Task: Economic Model, Assumptions, Types, Importance

and Significance

Quiz:

You have learned about the concepts of equilibrium,

comparative static models, differentiation and elasticity in
economics. Now, it's time to apply your understanding of these
concepts to a real-world scenario.

Scenario: How can the market for coffee be used as a practical

case to demonstrate the skills learnt in economic model,
assumptions, importance and significance? Provide examples
of scenarios that can be analyzed using these concepts.

Rubrics:

A. Assumptions: To model the demand and supply for

 potatoes, some common assumptions include:
1. Ceteris paribus assumption: This assumption holds
that all other factors affecting demand and supply
remain constant.
2. Rationality: Consumers and producers are assumed
to be rational and make decisions based on their
self-interest.
3. Perfect competition: The market is assumed to be
perfectly competitive, with many buyers and sellers,
homogeneous products, and no barriers to entry or
exit.

Importance and Significance:

Analyzing the demand and supply for potatoes can help us to

better understand how market forces affect the price and
quantity of goods in the economy.

By modeling the interactions between consumers and

producers in the potato market, we can make predictions about
the impact of changes in demand and supply on the market
equilibrium. For example, if there is an increase in demand for
potatoes due to a new health trend, we can predict that the
equilibrium price and quantity of potatoes will increase as a
result.

Examples of Scenarios:

1. A decrease in the price of fertilizer used to grow potatoes

leads to an increase in the supply of potatoes. We can use
economic modeling to predict the impact of this increase in
supply on the equilibrium price and quantity of potatoes.
2. A new potato chip company enters the market and begins
buying large quantities of potatoes. We can use economic
modeling to predict the impact of this increase in demand
on the equilibrium price and quantity of potatoes.
3. A drought in the potato-growing regions leads to a decrease
in the supply of potatoes. We can use economic modeling
to predict the impact of this decrease in supply on the
 equilibrium price and quantity of potatoes.
4. A new study is released linking potatoes to health benefits,
leading to an increase in consumer demand for potatoes.
We can use economic modeling to predict the impact of this
increase in demand on the equilibrium price and quantity of
potatoes.

ASSESSMENT OF Learner records practiced skill and uploads video on E-Portfolio

PRACTICAL SKILL:
OR

Learner engages in original creative /design activity to

demonstrate practical application of knowledge.

Assessment of tasks described.

LEARNING OUTCOME 4: Provide reading material which emphasizes reinforcement of

KEY/TRANSFERABLE topic learnt. How to communicate or share acquired knowledge
SKILLS

Perloff, J. M. (2021). Microeconomics: Theory and applications

with calculus, Global Edition (5nd ed.); sections 1.2 and 1.3
page 27-33.

ACTIVITY 8 Essay Question

Write an essay any simple practical scenario you have come

across on economic model in any sector in your country.

Answer Rubric:

One practical scenario that I have come across in my country

involves the housing market. Specifically, I have observed how
the principles of supply and demand, as well as other economic
concepts, impact the housing market in my local area.

To begin with, it is important to understand the assumptions

that underlie economic modeling, including the ceteris paribus
assumption, rationality, and perfect competition. These
assumptions are relevant in the housing market, as they help to
explain the behavior of buyers, sellers, and other market
participants.

One of the key factors that influence the housing market is

supply and demand. When demand for housing is high and
supply is low, prices tend to rise. Conversely, when demand is
low and supply is high, prices tend to fall. In my local area, I
have observed this dynamic in action, as housing prices have
risen steadily over the past few years due to high demand and
limited supply.

Another factor that impacts the housing market is the

availability of credit. When credit is easy to obtain, more people
are able to purchase homes, which can drive up demand and
prices. Conversely, when credit is tight, fewer people are able
to purchase homes, which can lead to a decrease in demand
and prices. This was evident during the housing crisis of 2008,
when a tightening of credit led to a decrease in demand and a
subsequent drop in housing prices.

In addition to supply and demand and credit availability, other

economic concepts also play a role in the housing market. For
example, the concept of elasticity can be applied to the housing
market to understand how changes in price or other factors
impact the quantity demanded or supplied. Similarly, the
concept of opportunity cost can help to explain why some
people choose to rent rather than buy a home, or vice versa.

Overall, the housing market is a practical scenario that can be

analyzed using economic models and concepts. By
understanding the assumptions that underlie economic
modeling, as well as the principles of supply and demand,
credit availability, elasticity, and opportunity cost, we can gain
insight into the behavior of buyers, sellers, and other market
participants, and make informed decisions about buying,
selling, or renting a home.
QUIZZ: For the following self-test questions, indicate whether each
statement is TRUE or FALSE

1. Economic models are simplified representations of real-

world economic systems.

A. True
B. False

Answer: A

2. Economic models are based on a set of assumptions about

the behavior of individuals and institutions.
A. True
B. False

Answer: A

3. There is only one type of economic model.

A. Trues
B. False

Answer: B

4. True or false: Economic modeling can be used to predict

the impact of policy changes on the economy.
A. True
B. False

Answer: B

5. The significance of economic modeling lies in its ability to

help policymakers make informed decisions based on a
thorough understanding of economic systems.
A. True
B. False

Answer: A
TAKE HOME MESSAGE Learner to state the take home message from their learning
experience.

Reference list Core Reading Materials

 1. Varian, H. R. (2014). Intermediate Microeconomics: A
Modern Approach (9th ed.). W. W. Norton & Company.

2. Perloff, J. M. (2021). Microeconomics: Theory and

Applications with Calculus, Global Edition (5th ed.).
Pearson.

3. Ernest. H, Richard. P and Richard. W (2021).

Introductory Mathematical Analysis for Business,
Economics, and the Life and Social Sciences, Global
Edition [14 ed.] Pearson.

4. Michael Klein (2014). Mathematical Methods for

Economics [2nd ed.], Pearson

Reference References

1. M. S. Mukras : (2004), Elements of Mathematical

Economics, KLB, Nairobi

2. C. Dinwiddy: (2007), Elementary Mathematics for

Economists, Oxford University Press, UK

3. Shapoor Vali (2014): Principles of Mathematical

Economics [1 ed.], Mathematics Textbooks for Science
and Engineering, Atlantis Press.

4. Vali S. (2015): Principles of mathematical economics II.

Mathematics Textbooks for Science and Engineering,
Atlantis Press.