Question ive always thought that theories were

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Unformatted text preview: weight. You will notice that this theory explains how things work (how your body takes in and uses up calories) in order to answer a question. All theories have this structure. A theory always offers some explanation of how things work in order to answer a question that does not have an obvious answer. QUESTION: I’ve always thought that theories were difficult to understand because they contain a lot of mathematics. Is this correct? ANSWER: Some theories contain mathematics, but many do not. Your impression of a theory is the common one. Many people think that a theory has to be abstract, mathematical, and almost impossible to understand. But this is a misconception. To a large extent, a theory is simply a “best guess” offered to explain something. Anyone can build a theory; in fact, you may (unknowingly) do so. Suppose your best friend always eats lunch with you. Then, one day he doesn’t. You may wonder what explains his change in behavior. Once you have a question in your mind—What led to the change in his behavior?—you are on your way to building a theory. Your “best guess” may be that he doesn’t like you anymore, or that you said something to upset him, or something 01 (002-029) EMC Chap 01 11/17/05 4:03 PM Page 21 altogether different. Trying to answer your question by offering your “best guess” is really no different from an economist creating a theory about some aspect of economics. The economist puts forth his or her “best guess” as to what causes inflation, high interest rates, or economic growth. Is It Reasonable? Many people evaluate a theory based on whether it seems reasonable. However, many theories that at first seemed very unreasonable to people turned out to be correct. Think about how it might have sounded to you if you had lived before microscopes were invented and someone told you that people were getting sick because of tiny “things” (which today we call germs) that no one could see. You might have thought that sounded ridiculous. Or suppose you had lived during the days of the Roman Empire and someone proposed the round-earth theory to answer a question. You might have said, “There is no such thing as a round earth!” Does It Predict Accurately? Scientists believe that we should evaluate theories based not on how they sound to us, or whether they seem right, but on how well they predict. If they predict well, then we Defining Terms 1. Define: a. incentive b. microeconomics c. macroeconomics d. theory 2. Use marginal costs correctly in a sentence. Reviewing Facts and Concepts 3. According to economists, almost everything we do has costs and benefits. Many of these people are unemployed and looking for work. Why do you think economists propose theories to explain unemployment? should accept them; if they predict poorly, then we should not. No doubt, as you read this text, you will come across an economic theory here or there that you think sounds wrong. You are urged to adopt the scientific attitude and hold off judging any economic theory until you learn how well it predicts. Identify the costs and benefits of each of the following: going to the dentist for a checkup, doing your homework, and getting an extra hour of sleep. 4. Give an example of an unintended effect. 5. What is the difference between microeconomics and macroeconomics? Critical Thinking 6. If there were zero opportunity cost to everything you did, would you ever face a trade-off? Explain your answer. Applying Economic Concepts 7. Describe a recent situation in which you weighed marginal costs versus marginal benefits to make a decision. Section 2 The Economic Way of Thinking 21 01 (002-029) EMC Chap 01 11/17/05 4:03 PM Page 22 Spend a Little Now, or a Lot More Later? M any people underestimate the power of saving. That’s because they don’t realize the large gains one can earn by saving— especially if they start saving when they are young. Save Now, or Save Later? You are probably 17 or 18 years old if you are reading this book. Suppose you go to college and when you are 22 you get your first full-time job, earning $45,000 a year. If, in that first year after graduating college—and only in that year—you 22 Chapter 1 What Is Economics? save $2,000, at an annual interest rate of 5 percent, and your interest is compounded quarterly (which means you earn an interest payment every three months), how much money will you have when you retire at age 65? The answer is $16,942. In other words, a one-time savings of $2,000 when you are 22 will turn into $16,942 by the time you retire at 65. It is likely, however, that if you are able to save money when you are 22, you will be able to save some when you are 23, 24, and so on. So, let’s suppose that instead of saving $2,000 only once, when you are 22, you save $2,000 every year between the ages of 22 and 65. We will assume again that your annual interest rate of return is 5 percent and that interest is compounded quarterly. How much will money will you have at 65? The answer is $319,526.46. Saving now—even if you save o...
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