Generalizations

As we have already mentioned, economic theories, principles, and laws are generalizations relating to economic behaviour or to the economy itself. They are imprecise because economic facts are usually diverse; no two individuals or institutions act in exactly the same way. Economic principles are expressed as the tendencies of typical or average consumers, workers, or business firms. For example, when economists say that consumer spending rises when personal income increases, they are well aware that some households may save all of an increase in their incomes. But, on average, and for the entire economy, spending goes up when income increases. Similarly, economists claim that consumers buy more of a particular product when its price falls. Some consumers may increase their purchases by a large amount, others by a small amount, and a few not at all. This "price-quantity" principle, however, holds for the typical consumer and for consumers as a group.

"OTHER-THINGS-EQUAL" ASSUMPTION

Like other scientists, economists use the ceteris aribus or other-things-equal assumption to arrive at their generalizations. They assume that all other variables except those under immediate consideration are held constant for a particular analysis. For example, consider the relationship between the price of Pepsi and the amount of it purchased. It helps to assume that, of all the factors that might influence the amount of Pepsi purchased (for example, the price of Pepsi, the price of Coca-Cola, and consumer incomes and preferences), only the price of Pepsi varies. We can then focus on the "price of Pepsi-purchases of Pepsi" relationship without being confused by changes in other variables.

Natural scientists such as chemists or physicists can usually conduct controlled experiments where "all other things" are in fact held constant (or virtually so). They can test with great precision the assumed relationship between two variables. For example, they might examine the height from which an object is dropped and the length of time it takes to hit the ground. But economics is not a laboratory science. Economists test their theories using real-world data, which are generated by the actual operation of the economy. In this complex environment, "other things" do change. Despite the development of sophisticated statistical techniques designed to hold other things equal, control is less than perfect. As a result, economic theories are less certain and less precise than those of laboratory sciences. That also means

CHAPTER ONE • THE NATURE AND METHOD OF ECONOMICS

they are more open to debate than many scientific theories (for example, the law of gravity.)

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