Representative vs. heterogenous agents[edit]

An economic model 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.^[5] For example, considering heterogeneity in age is likely to be necessary in a model used to study the economic effects of pensions;^[6] considering heterogeneity in wealth is likely to be necessary in a model used to study precautionary saving^[7] or redistributive taxation.^[8]