Scientific Method of Economics 1.2

1
Scientific Method of Economics 1.2

• Observation of facts
• Possible explanation of cause/effect (hypothesis)
• Testing of explanation by comparing outcomes
  predicted by hypothesis.
• Accept/reject/modify hypothesis
• Continual testing of hypothesis against facts.

2
Scientific Method, contd 1.2

• Favorable results of testing hypothesis evolves
  into a theory.
• A well tested/widely accepted theory is called a
  law or principle.
• Combinations of laws/principles are incorporated
  into a model (simple representations of how
  something works.)

3
Theoretical Economics 1.2

• Example Economists gather information about
  problems/issues.
• Relevant facts gathered
• Develops cause/effect relationships
• Tested against real world observation/data
• Theories/principles/laws
• Process of deriving theories/principles is called
  Theoretical Economics.

4
Economic Principles 1.2

• Economic principles statements about economic
  behavior or the economy that enable prediction of
  the probable effects of certain actions.
• Ex. Price of a product increaseslaw of demand
  says that the demand for that product will
  decrease. (Explains and predicts.)

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Terminology 1.2

• Hypothesis needs initial testing
• Theory has been tested but need more
• Law/Principle a theory that has provided strong
  predictive accuracy.
• Model Used to illustrate principles into a
  simplified representation of reality. (Graph,
  chart, etc.) (Ex a Roadmap is a model)
• Laws, theories, models, principles are sometimes
  used interchangeably.

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Terminology, contd 1.2

• Generalizations Imprecise because economic facts
  are diverse no two individuals, businesses, act
  in the same exact way.
• Tendencies of the average consumer
• Ex. Principle Consumer spending rises when
  personal income rises.
• Some may choose to save all their increase.
• Typical consumers will spend more

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Other Things Equal" AssumptionCeteris Parabis

• Assumes all other variables except those under
  immediate consideration are held constant for a
  particular analysis.
• Ex. Price of Diamondback tickets goes upwhat
  happens to ticket sales?
• Other variables may be
• How far out of first place is the team?
• What other activities are going on?
• All things are NOT equal in the real world.

8
Terminology 1.2

• Abstractions Economic principles/theories
  simplify a complex and overwhelming set of
  data/information by building models and
  developing principles/laws.
• Economic Policies a course of action based on
  economic principles that seek to solve an
  economic problem.
• Ex. Inflation

9
Economic Goals for U.S. 1.2

• Economic Growth
• Full employment
• Economic efficiency
• Price level stability
• Economic freedom
• Equitable distribution of income
• Economic security
• Balance of trade
• Note Disagree on how to achieve these

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Tradeoffs 1.2

• Economic tradeoff To achieve one goal may mean
  that another goal may have to be sacrificed or
  reduced.
• Examples
• Efforts to equalize distribution of income
• May reduce incentives to work, invest, take risks
• Tax high income people heavily
• May reduce business investments