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Raising a new Generation of Leaders

ECN 211: INTRODUCTION


TO ECONOMICS I (MICRO)
LECTURE 2
METHODOLOGY OF MICROECONOMICS
www.covenantuniversity.edu.ng

METHODOLOGY OF MICROECONOMICS
Raising a new Generation of Leaders

There are three methods of reasoning


in theoretical economics. They are:
Scientific Method
Deductive Method
Inductive Method
Steps in the Scientific Method

Observation
Hypothesis
Experiment
Data Collection
Conclusion
Retest
Observations
Gathered
through your
senses
An economist
notices
something in
their natural
world
Hypothesis
A suggested solution
to the problem.
Must be testable
Sometimes written
as IfThen
statements
Predicts an outcome
Experiment

A procedure to
test the
hypothesis.
Experiment

Variable factor in
the experiment
that is being
tested
Variables
The factor that is changed is known as
the independent variable.
The factor that is measured or
observed is called the dependent
variable.

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Data
Results of the
experiment
May be
quantitative
(numbers) or
qualitative
Data
Must be
organized
Can be
organized into
charts, tables,
or graphs
Conclusion
The answer to
the hypothesis
based on the
data obtained
from the
experiment
Scientific Method

Economics = Science => Economist=Scientist


The Scientific Method
Collect Data (observation or experimentation)
Formulate Behavioral Hypotheses
Make Predictions (attention to role of uncertainty)
Run Experiments to prove/disprove behavioral
hypotheses.
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Tools of Microeconomics
Economists use the scientific method:
Initial observation
Theorizing
Identification of additional implications
Further observation and testing
Refinement of the theory
A useful theory must have broad application but
also specific implications
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Economist as Scientist/Investigator

The Role of Assumptions


Simplifying facts about the world around us
Identifying the essential elements of the few to
generalize about the many
The Role of Models
Models are used to describe the way the world works
Models consist of diagrams and equations
Example 1: The Circular Flow of Money and Goods
(Figure 1)

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Models and Mathematics
Model: a simplified representation of a
complex phenomenon
Economists use models to provide an account of
cause and effect, to help us understand how the
world works
Some economic models are quantitative
(mathematical) so that they are more precise
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Simplifying Assumptions
All scientists build models based on
assumptions, so do economists
This allows the model to focus on the most
important explanations for a particular
phenomenon
No economic model is literally true
Some assumptions are easy to criticize
The test of a model is its usefulness
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Data Analysis
Scientific method requires models to be tested with data,
e.g., from:
Records (financial accounts, customer databases)
Surveys (Consumer Expenditure Survey, other
government or private sources)
Experiments
Econometrics: application of statistical methods to
empirical questions in economics
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Why Economists Disagree
Even with scientific method, still room to disagree
Differences in scientific judgment lead to disagreements
on positive questions
e.g. Look at the same data but come to a different
conclusion
Likely began from different assumptions; may be
able to resolve by empirically testing assumptions
Cant resolve normative disputes that arise from
differences in values

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DEDUCTIVE METHOD
Deductive methods means reasoning or
inference from the general to the particular or
from the universal to the individual. The
deductive method derives new conclusions
from fundamental assumptions or from truth
established by other methods.

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It involves the process of reasoning from certain
laws or principles; which are assumed to be
true to the analysis of facts from which
inferences are drawn and verified against
observed facts. Deductive method involves four
steps:

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Selecting the problem: The problem which an
investigator selects for enquiry must be stated
clearly. It may vary wide like poverty, unemployment
etc or narrow relating to an industry. The narrower the
problem, the better the enquiry.
Formulating assumptions: assumptions must be
general. More than one set of assumptions must be
made in terms of which a hypothesis may be
formulated.

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Formulating Hypothesis: hypothesis are formulated
based on logical reasoning from which conclusions
are drawn from its propositions.
Verifying the hypothesis: verifying consists of
confirming whether the hypothesis is in agreement
with facts. If an hypothesis is true or not can be
verified by observation and experiment.

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Assignment

State and explain the Advantages and


Disadvantages of using the Deductive
method.
State and explain the merits and demerits
of using the inductive method

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INDUCTIVE METHOD
Inductive or historical or analytical method is
the process of reasoning from particular to
general or from individual to universal. Micro
economic theories are based upon inductive
method.

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It is an ascending process in which facts are
collected, arranged and then general
conclusions are drawn. In summary, inductive
method is a process of reasoning in which one
develops general principles by looking for
patterns in the data.

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Inductive Steps
Inductive method includes the following
steps:
Selection and statement of problem.
Collection, enumeration, classification
and analysis of data: using appropriate
statistical techniques.

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Data are used to make observations: about
particular facts concerning the problem.
Generalization: on the basis of observation,
generalization is logically derived which
establishes a general truth from particular facts.

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Thus the induction process we
arrive at generalization based on
observed facts e.g. generalization
of diminishing returns.

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Economist as Policy Advisor

The Positive vs. Normative [Argument]


Positive the way things are
(descriptive)
Normative the way things ought to be
(prescriptive)

All Rights Reserved Dr. David P Echevarria


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Business Week (April 27: "What Good Are Economists
Anyway?)
"Why they failed to predict the global economic crisis
and why their help is critical to a recovery."
The "reality" predicting the future is more art than
science. A lot has to do with our assumptions and
our experiential memories.
Thomas Sargent (NYU): "the economy is volatile,
in part, because households and businesses hold
'fragile beliefs' that shift quickly." (pg 031)

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Positive Economic Analysis
Positive economic analysis: addresses factual questions,
typically about economic choices or market outcomes
What did happen? What will happen? What would
happen?
Historical fact-finding
Forecasting
Cause-and-effect analysis of actions and their
consequences
Stick to objective facts and avoid value judgments

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Normative Economic Analysis
Normative economic analysis: addresses
questions that involve value judgments
concerning the allocation of resources
What ought to happen?
Turn normative questions into positive
questions using the principle of individual
sovereignty
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Sources of Disagreement among Economists

Differences in Scientific Judgments


(opinions regarding interpretation)
Differences in Measuring Impact of
Policy
The problem of perception versus
reality
All Rights Reserved Dr. David P Echevarria
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THANK YOU
-Mrs A. Amalu
F302B
CBSS BUILDING
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