What exactly is an economic model? A clear explanation in one article.

Let's talk about the core first

Economic models sound sophisticated, but they actually simplify complex economic phenomena into understandable frameworks. It's a bit like flattening a maze to see it. Through it, we can:

• Understand how different economic factors influence each other (for example, the relationship between inflation and unemployment)
• Predict future trends (will interest rates rise, will prices fall)
• Assess the effects of the policy (what consequences will tax cuts bring)

What does the economic model look like

Four main components

1. Variable — Something that changes

• Price, output, income, interest rate, etc.

2. Parameters — Fixed rules

• The constant value that determines how the variable changes

3. Equation — Mathematical Expression

• Write the relationship between variables and parameters using a formula.

4. Assumption — Simplified conditions

• “Assuming perfect market competition” and “Assuming all consumers are rational” are such assumptions.

A simple example: Apple market

Imagine you are going to analyze how the price of apples is determined.

Identify variables: Price ( P ), Demand ( Qd ), Supply ( Qs )

Set Parameters:

• Price elasticity of demand = -50 (If the price increases by 1 unit, 50 fewer units are sold)
• Supply Price Elasticity = 100 (If the price increases by 1 unit, sell 100 more units)

Write the equation:

• Qd = 200 - 50P
• Qs = -50 + 100P

Equilibrium: When Qd = Qs

• 200 - 50P = -50 + 100P
• P ≈ $1.67, Q ≈ 117

This is the market clearing price - neither surplus nor shortage.

There are several economic models

What is the use of putting it into the crypto world?

1. Understanding Price Volatility

Supply and demand determine the price of the currency. The supply is fixed, for example, BTC has a limit of 21 million coins, but the demand can change. The model can help you see this relationship clearly.

( 2. Analyze On-chain Costs

High gas fees can scare away users, while low fees may not provide enough incentive. A cost model can predict the impact of this on network activity.

) 3. Play Scenario Simulation

“What will happen if regulation tightens?” “What will happen after a technological breakthrough?” Simulation models can measure these assumptions.

But be careful of these pitfalls

❌ Assumption is not close to reality

• The model assumes a perfectly competitive market with rational individuals → In reality, there is manipulation and emotional fluctuations.

❌ Over-simplification

• The model may overlook key factors.
• Everyone behaves differently, and one cannot generalize.

Practical Case: Phillips Curve

This model describes the inverse relationship of inflation ↑ unemployment ↓. Policymakers use it to weigh how much unemployment cost is incurred to control prices.

Bottom Line

Economic models are not universal, but they are very useful. They make complex economic interactions understandable and predictable. For the crypto space, understanding these models can help you analyze market dynamics on a deeper level—from supply and demand relationships, cost structures, to policy shocks.

In simple terms: the economic model is a “future prediction machine” played with mathematics and logic.