Microeconomics Models and Theories

Readers Question: “Microeconomics involves the study of models. These are central elements of theories”. Discuss the statement by providing examples of such models.

To be honest, when studying and teaching economics I have not really placed much emphasis on the distinction between models and theories.

The models that you use will depend on which syllabus and course you are doing. These are some of the basic models you might find in A Level economics

• Price Discrimination
• Perfect Competition
• Monopoly
• Oligopoly and Kinked Demand Curve
• Game Theory Pricing strategies

There is a strong relationship between theories and models

The definition of a theory suggests:

Theory n A model or framework (made up of a body of principles) to explain phenomena. The word ‘theory’ derives from the Greek word ‘theorein’, which means ‘to look at’.

If we take Monopoly. We could say that the Model of Monopoly involves looking at the graph for monopoly and seeing that a monopoly will maximise profits where MR=MC leading to high prices. The theory of monopoly could state monopolies act against the public interest because of the high prices and inefficiency indicated by the monopoly model.

However, in the real world, we may may find evidence that firms don’t behave as models and theories predict.

• Not all monopolies may be profit maximisers, they may seek to maximise market share.
• Some monopolies may benefit from economies of scale and may use their profit to enable greater efficiency.