1.6 Economic Model

Economists see the world differently than anthropologists, biologists, classicists, or practitioners of any other discipline. They analyze issues and problems using economic theories based on particular assumptions about human behaviour. These assumptions tend to be different than the assumptions an anthropologist or psychologist might use.

The purpose of a theory is to take a complex, real-world issue and simplify it to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to understand while complex enough to capture the key features of the object or situation you are studying. Sometimes, economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. Models in economics also help us to generate hypotheses about the real world.

The statement “Increased solar radiation increases the rate of plant growth” is a hypothesis; experiments could be done to show the relationship between solar radiation and plant growth. If solar radiation were shown to be unrelated to plant growth or to retard plant growth, then the hypothesis would be demonstrated to be false. If a test reveals that a particular hypothesis is false, then the hypothesis is rejected or modified. In the case of the hypothesis about solar radiation and plant growth, we would probably find that more sunlight increases plant growth over some range but that too much can retard plant growth. Such results would modify our hypothesis about the relationship between solar radiation and plant growth. Economists often use statistical methods to test a hypothesis.

If the tests of a hypothesis yield results consistent with it, then further tests are conducted. A hypothesis that has not been rejected after widespread testing and that wins general acceptance is commonly called a theory. A theory subjected to even more testing and awarded virtually universal acceptance becomes a law.

We will examine the economic model of the Production Possibilities Frontier in the next chapter and study two economic laws in Chapter 3.