What is an economic model? Why should encryption players understand it?

Core Overview

An economic model simplifies complex economic phenomena into an analyzable framework. For the cryptocurrency market, although not used directly, understanding basic logic such as supply and demand relationships and cost mechanisms can help you better predict price trends and the long-term performance of projects.

What on earth is an economic model?

In simple terms: Economic model = breaking down real economic problems into mathematical formulas.

For example, if you want to understand why Bitcoin is rising, economists would tell you: look at the supply (mining output) and demand (number of buyers). The struggle between these two forces determines the price. This is a model.

Three main functions:

• Explain the relationship between economic variables (Supply↑ → Price↓)
• Predict future trends (what will the coin price be after halving)
• Assess the impact of policies (how will rising transaction fees affect on-chain activity)

The Three Core Elements of the Model

1. Variable (something that can change)

• Price, trading volume, interest rate, inflation rate

2. Parameters (Fixed Value)

• For example, the “natural rate of unemployment” in the Phillips curve is a fixed reference point at a certain period.

3. Equation (Mathematical Relationship)

• The most famous is the Phillips curve: π = πe − β(u−un)
• Translation: Inflation rate = Expected inflation - Sensitivity coefficient × ( Actual unemployment rate - Natural unemployment rate )
• Core meaning: Low unemployment rate → High inflation pressure

A Simple Example: The Apple Market Model

Suppose we want to analyze how the price of apples is determined:

Step 1: Identify Variables

• Price ( P ), Demand ( Qd ), Supply ( Qs )

Step 2: Set Parameters

• Assume that for every $1 increase in price, the demand decreases by 50 apples.
• Assuming the price increases by $1, the supply increases by 100 apples.

Step 3: Write the equation

• Demand: Qd = 200 − 50P
• Supply: Qs = −50 + 100P

Step 4: Find the Balance Point When Qd = Qs:

• 200 - 50P = -50 + 100P
• P ≈ $1.67
• The trading volume is about 117 apples.

Conclusion: The price $1.67 is the market equilibrium point. Above this price → surplus; below → shortage.

Several Common Model Types

Visualization Model: Display with charts (most intuitive)

Mathematical Model: Purely formula derivation (most rigorous)

Simulation Model: Run different scenarios on the computer (most flexible)

Dynamic Model: Considering time factors (most realistic) vs Static Model (looking at only one moment)

How is the economic model used in crypto?

1. Understand Price Volatility

• Analyze using supply-demand model: New coin issuance increases ( supply ↑ ) vs institutional FOMO buying increases ( demand ↑ )
• Which force is stronger determines the price direction.

2. Analyze On-Chain Costs

• High gas fees ( costs ↑ ) → User migration ( demand ↓ ) → On-chain activity declines
• The cost model can be used to predict the intensity of this effect.

3. Stress Test

• Try using a simulation model: What would happen if regulation suddenly tightens? What would happen if BTC undergoes a halving?
• You can play through it before it happens in reality.

Two Major Flaws of the Model

Assuming is overly idealistic

• Assume the market is perfectly competitive and everyone is rational.
• Reality: Retail FOMO, Whale Manipulation, Irrational Fears
• Therefore, model predictions often go wrong.

Over-simplification

• The model removed a lot of “noise” to maintain usability.
• But the “noise” of reality is sometimes the decisive factor in winning or losing.
• For example, a regulatory news can render the model ineffective.

Models Commonly Used by Economics Experts

Supply and Demand Curve: The foundation of foundations, applicable to any market.

Phillips Curve: The relationship between inflation ↑ and unemployment ↓, a reference for central bank decision-making.

IS-LM Model: The relationship between interest rates and output

Solow Growth Model: Explains where long-term economic growth comes from (capital + labor + technology)

Bottom line

Economic models are not crystal balls, but they can help you establish a framework of thinking. In the crypto market, understanding fundamental concepts like supply and demand, costs, and expectations is more useful than blindly looking at candlestick charts. Remember: models are useful, but reality is often much more complex than the models.