economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

, an agent is an actor (more specifically, a

decision maker In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either rati ...

) in a

model A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure. Models c ...

of some aspect of the

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...

. Typically, every agent makes decisions by solving a well- or ill-defined

optimization Mathematical optimization (alternatively spelled ''optimisation'') or mathematical programming is the selection of a best element, with regard to some criterion, from some set of available alternatives. It is generally divided into two subfi ...

or choice problem. For example, ''buyers'' (

consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...

s) and ''sellers'' ( producers) are two common types of agents in

partial equilibrium In economics, partial equilibrium is a condition of economic equilibrium which analyzes only a single market, ''ceteris paribus'' (everything else remaining constant) except for the one change at a time being analyzed. In general equilibrium ana ...

models of a single

market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...

Macroeconomic model A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such a ...

s, especially

dynamic stochastic general equilibrium Dynamic stochastic general equilibrium modeling (abbreviated as DSGE, or DGE, or sometimes SDGE) is a macroeconomic method which is often employed by monetary and fiscal authorities for policy analysis, explaining historical time-series data, as we ...

models that are explicitly based on

microfoundations Microfoundations are an effort to understand macroeconomic phenomena in terms of economic agents' behaviors and their interactions.Maarten Janssen (2008),Microfoundations, in ''The New Palgrave Dictionary of Economics'', 2nd ed. Research in microf ...

, often distinguish

household A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is i ...

firm A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...

s, and

government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is ...

s or

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...

s as the main types of agents in the economy. Each of these agents may play multiple roles in the economy; households, for example, might act as consumers, as

workers The workforce or labour force is a concept referring to the pool of human beings either in employment or in unemployment. It is generally used to describe those working for a single company or industry, but can also apply to a geographic reg ...

, and as voters in the model. Some macroeconomic models distinguish even more types of agents, such as workers and shoppers or

commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with co ...

s. The term ''agent'' is also used in relation to principal–agent models; in this case, it refers specifically to someone delegated to act on behalf of a principal. In agent-based computational economics, corresponding agents are "computational objects modeled as interacting according to rules" over space and time, not real people. The rules are formulated to model behavior and social interactions based on stipulated incentives and information. The concept of an ''agent'' may be broadly interpreted to be any persistent individual, social, biological, or physical entity interacting with other such entities in the context of a dynamic multi-agent economic system.

Representative vs. heterogenous agents

economic model In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework desi ...

in which all agents of a given type (such as all consumers, or all firms) are assumed to be exactly identical is called a representative agent model. A model which recognizes differences among agents is called a heterogeneous agent model. Economists often use representative agent models when they want to describe the economy in the simplest terms possible. In contrast, they may be obliged to use heterogeneous agent models when differences among agents are directly relevant for the question at hand. For example, considering heterogeneity in age is likely to be necessary in a model used to study the economic effects of pensions; considering heterogeneity in wealth is likely to be necessary in a model used to study precautionary saving or redistributive taxation.

Representative vs. heterogenous agents

See also

References

Further reading