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2Lecture - LECTURE 2 Today is Wednesday ECONOMICS IS THE...

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LECTURE 2 Today is Wednesday, August 26, 2009. ECONOMICS IS THE SCIENCE OF THE ALLOCATION OF SCARCE RESOURCES FOR THE SATISFACTION OF HUMAN WANTS AND NEEDS. ECONOMICS AS A SCIENCE As we mentioned the first day, economics is a science. A science is “the intellectual and practical activity encompassing the systematic study of the structure and behavior of the physical and natural world through observation and experiment.” (Oxford Dictionary ) We also mentioned that economics is a science because it is a discipline in the Academy that advances the knowledge in the discipline by utilizing the scientific method . The scientific method is “a method of procedure that has characterized natural science since the 17 th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.” (Ditto ) A hypothesis is “a proposed explanation made on the basis of limited evidence as a starting point for further investigation.” (Ditto, again ) A theory is “a supposition or a system of ideas intended to explain something.” (You Got It ) So, if we put this all together, we get: Economists are scientists that have, for hundreds of years, observed how individuals, groups of individuals, societies, firms, (businesses), industries, states, nations, (and even rats!) 1 , utilize intelligence and reason to get the things that they want and need, and are rational , when it comes to making economic decisions. For example, economists observe how farmers behave, when they operate their farms. They hypothesize what it is that the farmer is trying to accomplish; what his goals are. They combine different hypotheses into a theory of what the farmer is doing, and trying. They observe which farmers are doing well, and which are not doing too well, in accomplishing their goals. They try to figure out if all the farmers have a common goal. Why are the farms different? Why do we observe different results? The Economists form a theory as to how a typical farmer will behave, with respect to the economic decisions he/she makes, when running the farm, (as well as how the owner/manager of any business will behave 2 ), and how the operator of the farm will behave in the face of different circumstances. The Economists 1 A fairly recent sub-field of economics, such as Microeconomics and Macroeconomics, is Experimental Economics , where rats are used in lab experiments to demonstrate that the laws and theories of economics apply to the rats just as they do to humans. You should note that in the universities that do a lot of Experimental Economics, they use College Students as often as they use rats. 2 Microeconomics doesn’t just explain how managers of farms behave. It explains how the managers of all businesses behave.
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gather data on as many farms (or businesses) that they can, and they test their theories . REMEMBER, THE PURPOSE OF A THEORY IS TO EXPLAIN WHAT WILL
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2Lecture - LECTURE 2 Today is Wednesday ECONOMICS IS THE...

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