The Economic Way of Thinking
Economists use a stage-gate process of problem-solving, developing a theory, collecting data, and verifying whether these data are consistent with the theory. After analyzing the results, economists formulate a conclusion. The first stage of the economic method is to identify the problem. Simplified authenticity is used to balance and forecast the relationship between variables. The second stage is the creation of the model. The model is an easy explanation of an entity used to understand the relationship between variables. The model and theory’s conditions are interchangeable. The model underlines only those variables that are of great significance to describing the event.
The purpose of the model is to build a really complicated abstract and make events clear. The good example is a highway map. To discover the best route between two remote cities, people do not need extra information about the location of tracks, streets, stop lamps, and educational institutions. These details make it difficult to select the best track. To be beneficial, the model demands simplified assumptions. It is necessary to decide, for instance, whether the map will contain only symbols for the main highways or details of hiking trails through the mountains (Tucker, 2011). Since the theory focuses on key variables, the economist should use observation to shape the model.
An economic model may be represented by a digital table, chart or mathematical equation. The economic theory can be expressed, for instance, in the form of A, B, and other constants. When the evidence is consistent with the theory that A leads to outcome B, there is confidence in the validity of the theory (Tucker, 2011). When the evidence contradicts the theory that A leads to outcome B, an economist rejects this theory. During the third stage, an economist collects data to test the truthfulness of the theory.
Some economists claim that the clean environment is the highest priority, while others believe that economic development is the main goal. It is not clear why economists share the same economic way of thinking and still disagree. Some individuals state that all economists should agree, but they pay no attention to the fact that physicists, physicians, business directors, and all people in other professions often disagree. Economists agree on a huge number of issues. For example, many economists agree on free trade between countries, the abolition of agricultural subsidies, etc. When there are disagreements, their cause may be explained with the help of the dissimilarity between positive and normative economics. Positive economics uses facts and solves the question “what is” (Tucker, 2011). Predictions of economists may be different because applying the economic method, they may prove that A causes outcome B, but do not agree with the hypothesis that occasion A will happen. Normative economics tries to determine “what should be” (Tucker, 2011). When views are not based on facts, they are unconfirmed.
An economic way of thinking indicates that the typical solution to the problem of economic deficits is reasonable behavior (Yevdocimov, 2012). The continuing problem of scarcity, which compels people to make choices, is the basis for defining economics. Economics studies how society decides to allocate its limited resources to the production of services and goods to meet unlimited needs (Tucker, 2011). People believe that economics means studying demand, supply, and the money market (Tucker, 2011). There are many other ways of defining economics, but economists accept the definition mentioned above because it involves the link between the deficit and choice. Society makes macro and micro choices.
To conclude, the economic method includes problem identification, data collection, model development, and theory testing. Economics studies how people and society decide to allocate limited resources to meet increasing needs. Scarcity is a burning economic issue that people want to overcome with the help of available goods and possibilities. However, it is impossible to satisfy all individuals’ needs.
Tucker, I. B. (2011). Economics for today (7th ed.). Mason, OH: South-Western Cengage Learning.
Yevdocimov, Y. (2012). Practical guide to contemporary economics. Retrieved from https://agpgim.files.wordpress.com/2013/03/practical-guide-to-contemporary-economics.pdf.