2. 2 Building and Testing Economic Theories
Testing Theories
The economic world is complex. Many things are changing at the same
time, and it is usually difficult to distinguish cause from effect. By
examining data carefully, however, regularities and trends can be
detected. To better understand these patterns in the data, economists
develop theories, which they sometimes call models. Theories are used to
both explain events that have already happened and to help predict
events that might happen in the future.What Are Theories?
Theories are constructed to explain things. For example, economists may
seek to explain what determines the quantity of eggs bought and sold in a
particular month in Manitoba and the price at which they are sold. Or
they may seek to explain what determines the quantity of oil bought and
sold around the world on a particular day and the price at which it is
traded. As part of the answer to such questions, economists have
developed theories of demand and supply—theories that we will study in
detail in the next three chapters. These and all other theories are
distinguished by their variables, assumptions, and predictions.Variables