Microeconomics,, 16th Canadian Edition

(Sean Pound) #1
The scientific approach is central to the study of economics: Empirical observation leads to the
construction of theories, theories generate specific predictions, and the predictions are tested
by more detailed empirical observation.

Statistical Analysis

Most theories generate a prediction of the form “If X increases, then
also increase.” A specific example is “If national income rises, the level of
employment will rise.” Another is “If the price of eggs declines,
consumers will purchase more eggs.” Statistical analysis can be used to
test such predictions. In practice, the same data can be used
simultaneously to test whether a relationship exists between X and Y
if it does exist, to provide an estimate of the magnitude of that

Because economics is primarily a non-laboratory science, it lacks the
controlled experiments central to such sciences as physics and chemistry.
Economics must therefore use millions of uncontrolled “experiments” that
are going on every day in the marketplace. Households are deciding what
to purchase given changing prices and incomes, firms are deciding what
to produce and how, and governments are involved in the economy
through their various taxes, subsidies, and regulations. Because all these
activities can be observed and recorded, a mass of data is continually
being produced by the economy.

The variables that interest economists—such as the level of employment,
the price of a laptop, and the output of automobiles—are generally
influenced by many forces that vary simultaneously. If economists are to

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