Economic theory, sometimes known as the “science of scarcity,” is the scientific study of who owns, uses, and exchanges limited resources. Because it employs scientific methods to develop hypotheses that can aid in explaining the behaviour of individuals, communities, and organisations, economics is recognised as a social science. Economics makes an effort to understand the economic behaviour that results from the trade of limited resources.
In terms of technique, unlike chemists and biologists, economists and other social scientists are unable to conduct controlled experiments. Because of this, economists have to use many different methods, most of which are based on observation, deduction, and making abstract models.
Over the past century, the social sciences have advanced and become more specialised. This is true for economics, as evidenced by the growth of several distinct research strands, including micro and macroeconomics; economics as a pure and applied science; and economics as a branch of finance and industry. Understanding how and why trade occurs, as well as how it affects participants’ costs and rewards, is what unites them all.
Additional Resource :Importance of macroeconomics
Three interconnected inquiries are part of the study of economics.
- Why are limited resources traded?
- How do consumers and producers conduct themselves in markets when they interact with one another in an effort to accomplish a mutually beneficial exchange?
- What part does the government play in overcoming market constraints to achieve a mutually beneficial exchange?
The Techniques Employed By Economists
In their research, economists employ scientific observation and deduction. To do this, they:
Describe and quantify the interactions they see.
Economists track and describe changes in economic variables across time. For instance, economists explain and quantify how market interactions affect the pricing of a wide range of goods, including automobiles, homes, haircuts, and computer software. In economics, measurement can take many different forms, including calculating both absolute and relative amounts and values. Index numbers are frequently used to measure relative values.
Describe How Interactions Develop, Leading To Costs And Rewards
The consequences or outcomes of economic interactions are attempted to be explained by economists. For instance, economists can identify people who have benefited and suffered from the rise in home prices in the UK over the past 30 years, and they can also explain why there have been bubbles and collapses notwithstanding this rise. Of course, economists also attempt to explain short-term price fluctuations and how they, too, have advantages and disadvantages.
Create “Models” And Use Them To Test The Hypotheses You’ve Proposed
Economists use models to test their theories after developing hypotheses to explain why economic behaviour occurs, much like all sciences do. To build a pricing model that explains how excess demand might raise prices, economists can, for instance, argue that price increases are the result of excessive demand. Demand and supply models are widely used by economists to help explain occurrences, such as trends and swings in home price. To describe and demonstrate such economic processes, economic models often use graphical and mathematical analysis.
Assemble Information For The Model
To compare models to the real world, statistical information regarding actual events must be gathered. This allows for the improvement and revision of a model as needed.
Using These Models, Make Behaviour Predictions
Predicting future behaviour is the economist’s ultimate objective. For instance, economists can demonstrate that even a tiny decline in bank lending can cause behaviour that results in a big short-term decline in home prices by utilising a demand and supply model and real data on the housing market. The ability of an economic model to precisely forecast both the beginning and the outcome of an economic event is its greatest strength. The more accurate the model, the more helpful it will be to economists in making forecasts.
Economists believe that economic events and phenomena are not driven by random chance, but rather by underlying, clear reasons. Economists must test their theories in multiple ways since, unlike pure scientists, they are unable to conduct controlled experiments. Actual economic data may be statistically analysed to provide knowledge that can be used to develop models and test theories. For instance, it is feasible to determine what influences home prices and how much they fluctuate by collecting data on changes in housing costs. Index numbers are used by economists to facilitate comparisons between nations and throughout time.
Strong and weak causal links may be distinguished using correlation analysis, which can assist assess the strength of certain causal interactions. For instance, it could be able to show that the lack of loan availability is the main cause of dropping housing prices out of all the contributing elements.
Solved Example on Economic Activity
Q: _____ is the economic activity that comprises the whole spectrum of economic activities from production to distribution to trading of goods and services
- None of the above
Ans: The correct answer is C. Business is the sum total of all economic activities related to the production and selling of goods and services. Industry, trade, and commerce are all sub-classifications of business.