The basic elements of any theory are its variables. A variable is a well-
defined item, such as a price or a quantity, that can take on different
possible values.
In a theory of the egg market, the variable quantity of eggs might be
defined as the number of cartons of 12 Grade A large eggs. The variable
price of eggs is the amount of money that must be given up to purchase
each carton of eggs. The particular values taken by those two variables
might be 20 000 cartons per week at a price of $2.60 in July 2017, 18 000
cartons per week at a price of $2.75 in July 2018, and 19 500 cartons per
week at a price of $2.95 in July 2019.
There are two broad categories of variables that are important in any
theory. An endogenous variable is one whose value is determined
within the theory. An exogenous variable influences the endogenous
variables but is itself determined outside the theory. To illustrate the
difference, the price of eggs and the quantity of eggs are endogenous
variables in our theory of the egg market—our theory is designed to
explain them. The state of the weather, however, is an exogenous
variable. It may well affect the number of eggs consumers demand or
producers supply, but we can safely assume that the state of the weather
is not influenced by the market for eggs.
Assumptions
A theory’s assumptions concern motives, directions of causation, and the
conditions under which the theory is meant to apply.