Why is the Economic Mathematical Model Semester 1 Important for Market Analysis?

Introduction: More Than Just Theory

When first encountering the material of economic mathematics in the first semester, many ask: “What is the use?” The answer is simple yet strong — economic models are tools for understanding the complex world. By simplifying complex economic processes, we can make predictions, plan strategies, and make better decisions. Not just for academics, this concept is highly relevant for analyzing the modern crypto market.

What Is the Economic Model Really?

An economic model is a scaled-down representation of how an economic system works. It combines various economic elements — such as prices, demand, supply, inflation, and unemployment — into a single framework that is easy to analyze.

There are three main functions:

1. Explaining the mechanism — How various economic factors are interconnected and influence each other.
2. Predicting trends — Allows economists and decision-makers to anticipate what will happen in the future.
3. Evaluating policies — Measuring the potential impact of government actions or market changes before they are implemented.

Building Blocks: Core Components of the Economic Model

Every economic model is built from four fundamental elements:

Variable: Moving Element

Variables are dynamic elements that can change and affect outcomes. In the first semester economic mathematics material, you will learn four key variables:

• Price — The exchange value of money for goods or services
• Quantity — Volume of production or consumption
• Income — The flow of money received
• Interest rate — The cost of borrowing funds

Parameter: Fixed Values

Parameters are constants that govern the behavior of variables. They do not change in a specific model. For example, price elasticity indicates how sensitive demand is to changes in price. In the labor market, an important parameter is NAIRU (Non-Accelerating Inflation Rate of Unemployment) — the unemployment rate at which inflation remains stable.

Equation: Language of Economic Mathematics

Equations are the backbone of economic models. They express mathematical relationships between variables and parameters. A famous example is the Phillips Curve, which shows the relationship between inflation and unemployment:

π = πe − β(u − un)

Here, π is the actual inflation, πe is the expected inflation, u is the current unemployment, un is the natural unemployment, and β measures how responsive inflation is to changes in unemployment.

Assumption: Necessary Simplification

Models can only work by making assumptions. Common assumptions include:

• Rational behavior — All economic agents make decisions to maximize profit or satisfaction
• Perfect competition — No single party can control the market
• Ceteris paribus — All other variables remain constant while we test one variable.

This assumption makes the model simpler, but also limits it.

How Does the Economic Model Work in Practice?

Let's use a concrete example: the apple market. The model development process follows systematic steps.

Step 1: Identify Key Variables

First, determine what will be analyzed:

• Apple price (P)
• The quantity that consumers want to buy (Qd — Quantity Demanded)
• The amount that producers want to sell (Qs — Quantity Supplied )

Step 2: Define Parameters

Collect real data to estimate parameters, such as:

• Demand elasticity = -50 ( means that for every $1 increase in price, demand decreases by 50 units)
• Supply elasticity = 100 (for every $1 increase in price, supply increases by 100 units)

Step 3: Create Equation

From the data, we derive the equation:

• Qd = 200 − 50P
• Qs = −50 + 100P

Step 4: Set Assumptions

The conditions we assume: the market has many buyers and sellers, and all other factors (weather, production costs) remain the same.

Step 5: Find Equilibrium

The market reaches equilibrium when Qd = Qs:

200 − 50P = −50 + 100P 250 = 150P P = $1.67 (equilibrium price)

Substitution back to obtain quantity: Q ≈ 117 apples

At the price of $1.67, the quantity that wants to be bought is equal to the quantity available. Above this price, there is a surplus (too many apples), below it there is a shortage (too few apples).

Types of Economic Models

Not all models are created equal. The choice of type depends on the purpose of the analysis:

Visual Model uses graphs and charts — easy to understand, suitable for introductory learning in the subject of economic mathematics semester 1.

Mathematical Model uses equations — more precise, deeper, suitable for advanced analysis.

Empirical Model based on real-world data — shows factual relationships, not just theoretical ones.

Dynamic Model incorporates time as a dimension — depicting changes over time, more realistic for long-term trends.

Simulation Model using computers to mimic scenarios — allowing experiments without real-world risks.

Expectation Model considers future predictions — if people expect inflation to rise, they will change their spending behavior now.

Applying Economic Models to the Crypto Market

Economic theory is not exclusive to traditional markets. This concept is also relevant to digital assets:

Coin Demand and Supply

The classical supply-demand model applies to crypto. The limited number of coins ( fixed supply ) meets the fluctuating number of buyers ( changing demand ), creating price volatility. Understanding this dynamics helps investors predict price movements.

Transaction Fees and Network Efficiency

Gas fees or transaction costs on the blockchain can be analyzed using economic models. High costs hinder adoption, while low costs encourage usage. This directly affects how many people are willing to use the network.

Simulation Scenario for the Future

With simulation models, we can ask: “What if regulations change?” or “What if blockchain technology becomes 10x more efficient?” Although hypothetical, these answers provide a framework for strategic thinking.

Limitations to Be Aware Of

There is no perfect model. Students studying the economic mathematics material in the first semester need to know these weaknesses:

Unrealistic Assumptions — Models often assume perfect competition, rational behavior, and perfect information. In the real world, all of these rarely occur fully.

Oversimplification — By reducing complexity, models may overlook important factors. For example, standard supply-demand models do not account for the influence of social media or market sentiment on cryptocurrency prices.

Data Not Available — For empirical models, data quality is crucial. Poor or incomplete data will lead to poor predictions.

Practical Applications of Economic Models

Why study all this? Because economic models have real-world applications:

Policy Analysis

The government uses models to evaluate the impact of tax increases, interest rate changes, or fiscal stimulus. The results help make more effective decisions.

Business Forecasting

The company uses models to project demand for their products, plan production levels, and allocate resources. In crypto, this means predicting user adoption or growth in lock-up value in DeFi protocols.

Personal Financial Planning

Individuals who understand the model can make more informed investment decisions — when to buy, when to sell, what risks are involved.

Famous Economic Model Examples

Some models have become industry standards:

Supply and Demand Model — The most basic model that uses two curves to determine market equilibrium price and quantity.

Phillips Curve — Shows the trade-off between inflation and unemployment; useful for monetary policymakers.

IS-LM Model — Analyzing the equilibrium of the goods market and the money market, showing how interest rates and output are related.

Solow Growth Model — Examining long-term economic growth with a focus on capital, labor, and technology.

Conclusion

Economic models are a bridge between abstract theory and practical decisions. They simplify complex realities so that they can be analyzed, predicted, and managed. For students studying the first semester economics mathematics material, this is the foundation for understanding macroeconomics, market analysis, and even the dynamics of digital assets.

Although not perfect — with often unrealistic assumptions and excessive simplifications — the model remains the most powerful tool we have to understand the “why” behind every economic decision, from government policy to crypto investment strategies.

A deep understanding of how economic models work opens new ways to view the market and make smarter decisions.