Theoretical Economics

Theories

Facts theorETicaL economics

The process of deriving and applying economic theories and principles.

principles

Statements about economic behaviour that enable prediction of the probable effects of certain actions.

data. Through this process, the economist tries to discover hypotheses that rise to the level of theories and principles (or laws)—well-tested and widely accepted generalizations about how individuals and institutions behave. The process of deriving theories and principles is called theoretical economics (see the lower box in Figure 1-1). The role of economic theorizing is to systematically arrange facts, inter ret them, and generalize from them. Theories and principles bring order and meaning to facts by arranging them in cause-and-effect order.

Observe that the arrow from "theories" to "facts" in Figure 1-1 moves in both directions. Some understanding of factual, real-world evidence is required to formulate meaningful hypotheses. And hypotheses are tested through gathering and organizing factual data to see if the hypotheses can be verified.

Economic theories and principles are statements about economic behaviour that enable rediction of the robable effects of certain actions. Good theories are those that do a good job of explaining and predicting. They are supported by facts concerning how individuals and institutions actually behave in producing, exchanging, and consuming goods and services. But these facts may change over time, so economists must continually check theories against the shifting economic environment.

Several other points relating to economic principles are important to know.

Part One • An Introduction to Economics and the Economy generalization Statement of the nature of the relation between two or more sets of facts.

things-

EquAL

assumption

The assumption that factors other than those being considered are held constant.

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