Economic Way of Thinking

Economic Way of Thinking

Nguyen Bao Chau

BSM 407

Submitted to

Dr. Bruce Huang

Economic Way of Thinking

Economic way of thinking examines how people make choices under conditions of scarcity and systems of production, consumption, and distribution. It also examines the effects of government policy and actions on market outcomes. The economic way of thinking provides a decision-making framework for individuals, firms and policy-makers. (  It is social science because it involves people and their behavior, and it uses, as much as possible, a scientific approach in its investigation of choices.

Problem identification

Economics differs from other social sciences because of its emphasis on opportunity cost, the assumption of maximization in terms of one’s own self-interest, and the analysis of choices at the margin. But certainly much of the basic methodology of economics and many of its difficulties are common to every social science—indeed, to every science.

Researchers often examine relationships between variables. A variable is something whose value can change. By contrast, a constant is something whose value does not change. The speed at which a car is traveling is an example of a variable. The number of minutes in an hour is an example of a constant.

Research is generally conducted within a framework called the scientific method, a systematic set of procedures through which knowledge is created. In the scientific method, hypotheses are suggested and then tested. A hypothesis is an assertion of a relationship between two or more variables that could be proven to be false. A statement is not a hypothesis if no conceivable test could show it to be false. For instance, the statement “Plants like sunshine” is not a hypothesis. There is no way to test whether plants like sunshine or not, so it is impossible to prove the statement false. ( Andy Schmitz, 2012)

Models Development

Models are always based on assumed conditions that are simpler than those of the real world, assumptions that are necessarily false. A model of the real world cannot be the real world. Economists often use graphs to represent economic models. The appendix to this chapter provides a quick, refresher course, if you think you need one, on understanding, building, and using graphs. Models in economics also help us to generate hypotheses about the real world. In the next section, we will examine some of the problems we encounter in testing those hypotheses. (Andy Schmitz, 2012)

Testing a Theory

A hypothesis suggested by the model of demand and supply: an increase in the price of gasoline will reduce the quantity of gasoline consumers demand. Economists try to test hypotheses such as this one by observing actual behavior and using empirical data. The hypothesis that an increase in the price of gasoline produces a reduction in the quantity demanded by consumers carries with it the assumption that there are no other changes that might also affect consumer demand. A better statement of the hypothesis would be: An increase in the price of gasoline will reduce the quantity consumers demand, “ all other things unchanged.