economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

, 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 ra ...

) 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 , . Models can be divided in ...

of some aspect of the

economy An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...

. 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 criteria, from some set of available alternatives. It is generally divided into two subfiel ...

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

consumer A consumer is a person or a group who intends to order, or use 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 models of a single market.

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 macroeconomics, macroeconomic method which is often employed by monetary and fiscal authorities for policy analysis, explaining historical time-s ...

models that are explicitly based on

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

, often distinguish

household A household consists of one 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 im ...

firm A company, abbreviated as co., is a Legal personality, legal entity representing an association of legal people, whether Natural person, natural, Juridical person, juridical or a mixture of both, with a specific objective. Company members ...

s, and

government A government is the system or group of people governing an organized community, generally a State (polity), state. In the case of its broad associative definition, government normally consists of legislature, executive (government), execu ...

s or

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

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, 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 that accepts deposits from the public and gives loans for the purposes of consumption and investment to make a profit. It can also refer to a bank or a division of a larger bank that deals with whol ...

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 Agent-based computational economics (ACE) is the area of computational economics that studies economic processes, including whole economies, as dynamic systems of interacting agents. As such, it falls in the paradigm of complex adaptive systems. ...

, 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 An economic 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 designed ...

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 Economists use the term representative agent to refer to the typical decision-maker of a certain type (for example, the typical consumer, or the typical firm). More technically, an economic model is said to have a representative agent if all agen ...

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