"Study Of" -- Using theories
If we go back to our formal definition of economics:
"Economics is the study of how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants"
We have discussed the necessity of choice, sczarcity (limited resources and unlimited wants) and achieving the maximum satisfaction possible (4Es). We have not yet discussed the "study of" part of our definition.
Two related characteristics of economics courses make them difficult for some students:
To make it a little more complicated, economists often use graphs to illustrate theories. First let's talk about the theoretical nature of economics.
You have probably heard it said that something "sounds good in theory, but it doesn't work in the real world". Ross Perot, billionaire and Reform Party candidate for president in 1996, said this about the theory of comparartive advantage, the theory behind international trade. Perot opposed NAFTA, the North American Free Trade agreement between the U.S., Canada, and Mexico. "Free trade sounds good in theory, but it doesn't work in the real world."
This doesn't make sense.
Good theories have to work in the real world or they are not good theories. Five characteristics of economic theories are worth noting:
Theories are based on facts (data). Economists gather data then try to find theories to elxplain the data. Let's take a simple theory:
This theory is based on the facts, but memorizing hundreds of different price and quantity combinations for various types of pizza would be difficult and quite useless.
Theories then simplify the facts. Hundreds of pages of facts would not be very useful to us. It is much simpler to learn that if the price of pizza rises, the quantiy sold declines.
A former instructor at Harper College coined the term "Aunt Martha Syndrome" to illustrate that theories are generalizations of the facts. Every semester there seems to be a student who tries to prove that a theory is wrong by finding an exception. They'll say, "My Aunt Martha buys MORE pizzas if the prices rise." We have to understand that economic theories are not designed to explain every instance, but rather general patterns. An economist can't explain Aunt Martha's behavior. Maybe a psychologist can help.
Theories are also abstractions. Like modern, abstract, art, theories may bear little actual resemblance to the real world. Yet, like modern art, theories can still be useful.
For example, if I needed to draw a picture of a person for this economics class, I might draw something like:
Even though this doesn't look much like people really do - it is a quick, and useful, way to represent reality. BUT, if I was in an art class and drew this picture for my final class project I would fail. It is not a good and useful drawing for an art project. Theories, as abstractions, are similar. In order to make them simple, they are designed to be used only for specific purposes. One of your jobs as a student of economics is to learn what each theory is designed to explain and what they don't explain.
This picture of a stick man is based on facts (people have two arms, two legs, etc), it is simplified, it is generalized (not all people have two arms or two legs) and it is abstract (useful for some purposes, useless for others).
Finally, since economics is a social science, economists study human behavior. this makes experiementation more difficult than in the other sciences. If you were to conduct a biology experiment to see how the amount of light affects plant growth you may select five plants of tne SAME kind, put them in the SAME size pot, add the SAME amount of water and fertilizer to each, but then give each plant a different amount of light each day.
But if you wanted to test what happens to the quantity of pizza sold when the price of pizza rises
You could not control all other factors that may affect the experiment. Many other factors may also affect the quantity of pizza sold - higher incomes, different lifestyles, cheaper beer, etc. Therefore, economists as social scientist employ the ceteris paribus assumption. Ceteris paribus is Latin for "all other things remain equal". To control for other factors, economists ASSUME that they don't exist. This isolates the issues being studdind (price and quantity), but it does make the theory less realistic.
Economists often use graphs to illustrate their theories. Pay close attention to the appendix to chapter 1 and to the study guide questions if you are uncomfortable using graphs..
I don't have much to add to it except this: any point on a graphy represents two numbers. You find one number by looking at the x-axis directly beneaththe point. And you find the other number by looking at the y-axis directly to the left (usually left) of the point. don't let the graphs confuse you. They only represent different combinations of two numbers.
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