Microeconomics,, 16th Canadian Edition

Theory and observation are in continuous interaction. Starting (at the
top left) with the assumptions of a theory and the definitions of relevant
terms, the theorist deduces by logical analysis everything that is implied
by the assumptions. These implications are the predictions or the
hypotheses of the theory. The theory is then tested by confronting its
predictions with evidence. If the theory is in conflict with facts, it will
usually be amended to make it consistent with those facts (thereby
making it a better theory), or it will be discarded, to be replaced by a
superior theory. The process then begins again: The new or amended
theory is subjected first to logical analysis and then to empirical testing.