Economic Thinking Paper

Economic Thinking Paper

Cuong Le Quoc

City University of Seattle

BSM 407 – Business Economics

Prof. Tony Mookerjee

January 31, 2021

Economic Thinking Paper

What is the economic way of thinking

We are living in the modern world, where things are growing rapidly to meet the high

demands of life. What reflects this development most clearly is the current world economy,

everything is gradually commercialized, more utility products are created. From an economic

point of view, we can understand this positive change by the definition of. “Scarcity” is the

condition in which human wants are forever greater than the available supply of time, goods, and

resources. It is impossible to meet everyone’s demand since there is not enough resource to

produce all the necessary goods and services to satisfy all human needs (Tucker, 2014). Humans

were able to fly out into space, study things outside the earth, build tourist resorts and

amusement parks in difficult terrain. All of that shows the desire to achieve achievements that

challenge human abilities. Thus, we need to allocate its scarce resources into available

production. In way of economic thinking, the study of how society chooses to allocate its scarcer

sources to the production of goods and services to satisfy unlimited wants (Tucker, 2014). From

that point, this paper shall analyze the economic way of thinking, it is included problem

identification, model development, testing theories and why economists disagree with such a

prescriptive way of thinking.

What methods do economist use for problem identification

In a business, the greater the workload, the higher the risks are. When these problems arise, it is

not only quick but also accurate to prevent from consequences latterly. There are three steps in

the Model-Building process which is Identify the problem; Develop a model based on simplified

assumptions; Collect data, test the model, and formulate a conclusion. According to Tucker,

economists employ a step-by-step procedure for solving problems by identifying the problem,
Economic Thinking Paper

developing a model, gathering data, and testing whether the data are consistent with the theory

(Tucker, 2014). Normally, Mathematical economics uses mathematical methods, such as algebra

and calculus, to represent theories and analyze problems in economics; The scientific method

involves identifying a problem, gathering data, forming a hypothesis, testing the hypothesis, and

analyzing the results ("Economic Models | Boundless Economics", n.d.). Furthermore, as the

advance in the technology, most company now are using some problem management tool and

mind mapping to monitor and manage problem. There are several useful tools on the internet

which is quite familiar nowadays such as Flowchart, Check Sheet, Cause and Effect diagram

Model development in economics

When the problem has been identified, the next step is building a model - a simplified

description of reality to understand and predict the relationship between variables. A model

emphasizes only those variables that are most important to explaining an event (Tucker, 2014).

According to Burzykowski, there are two approach to statistical modelling: explanatory and

predictive. In explanatory modelling, models are applied for inferential purposes, i.e., to test

hypotheses resulting from some theoretical considerations related to the investigated

phenomenon (for instance, related to an effect of a particular clinical factor on a probability of a

disease). In predictive modelling, models are used for the purpose of predicting the value of a

new or future observation (for instance, whether a person has got or will develop a disease)

(Burzykowski. P, 2021). The purpose of a model is to construct an abstraction from real-world

complexities and make events understandable (Tucker, 2014). In specific situation, each business

has different working target so they can choose which type of modelling is suitable for their

purpose to start evaluating and forecasting.

Economic Thinking Paper

Testing the theories

In the Product Development Process of any company, they must have been gone through

the stage screening and concept development. This is the time they prepare some idea for

hypothesis and testing data which is important step before a business trying to jump into a

competitive market. “An economic model can be stated as a verbal argument, numerical table

graph, or mathematical equation”. The purpose of an economic model is “to forecast or predict

the result of various changes in variables” (Tucker, 2014). As the content of testing theories in

“Economics for today” of Irvin Tucker, the economic theory can be illustrated like “If A, then B,

other things held constant.” An economic theory is useful only if it yields accurate predictions.

When the evidence is consistent with the theory that A causes outcome B, there is confidence in

the theory’s validity. However, when the evidence become inconsistent that A causes outcome B,

the theory is rejected (Tucker, 2014). The purpose of theory testing is to verify the validity of a

presented hypothesis about the theoretical structure of theory in empirical reality (Testing of a

Theory, 2020). For example, we want to test the theory that if the price of clean water goes up,

then the amount of clean water falls, all the factor which is relevant hold constantly. Supposing

that the price of clean water rises noticeably in the summer of the given year. The amount of

clean water per month falls when its price rises. Thus, the conclusion is valid if the consumer

incomes or population size does not change when the price of water rise.

Why do economists disagree

Economic Thinking Paper

To find the answer why economist disagree, given such a prescriptive way of thinking,

we need to comprehend what positive economics and normative economics is firstly. Normative

economics focuses on the value of economic fairness, or what the economy "should be" or

"ought to be."; While positive economics is based on fact and cannot be approved or

disapproved, normative economics is based on value judgments (Fontinelle, 2020). The

difference between these kinds of economics is the reason why the disagreement occurs. For a

clear example, supposing that that three stock investment advisors consider the given data, and

they have three different forecasts for the Vietnam stock market. Mr. A says that the VN-INDEX

will surpass the resistance level of 1200 points in the next two quarters. Mr. B says that the VN-

INDEX will gradually decrease to 1100 points and maintain in the next two quarters. Ms. C says

that the VN-INDEX will remain flat in the next two quarters. There is only one data but lots of

different results.

In conclusion, the view of economic way gives us an academic view in every aspect of life. The

scarcity points out the way to allocate suitable resources, the model-building process offer the

opportunities to manage problem, analyze the data to forecast events in the future. However,

when the rising of differences in the view of economist, it creates a lot of conflict opinions.
Economic Thinking Paper

References

Burzykowski, P. (2021). 2 Model Development | Explanatory Model Analysis. Retrieved 31

January 2021, from http://ema.drwhy.ai/modelDevelopmentProcess.html
Economic Models | Boundless Economics. Retrieved 31 January 2021, from
https://courses.lumenlearning.com/boundless-economics/chapter/economic-models/
Fonetinelle, A, (2020). Positive vs. Normative Economics: What's the Difference? Retrieved
from: https://www.investopedia.com/ask/answers/12/difference-between-positive-normative-
economics.asp#:~:text=Normative%20economics%20focuses%20on%20the%20value%20of
%20economic%20fairness%2C%20or,is%20based%20on%20value%20judgments
Testing of a Theory. (2020). Retrieved 31 January 2021, from https://nursekey.com/testing-of-a-
theory/
Tucker, I. (2014). Economics For Today (8th ed.). South - Western Cengage Learning