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March 30, 2017 

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X-INEFFICIENCY: Cost that is higher than it needs to be because a firm is operating inefficiently. This is most often seen for firms that have a great deal of market control, especially monopoly. The lack of competition allows a business to pad it's expenses, hire unneeded employees (like relatives), goof off instead of working, and all sorts of other things that lessen production and increase cost. The business is not penalized for these actions, because market control allows the company to extract whatever price is needed to cover cost.

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ABSTRACTION:

Simplifying the complexities of the real world by ignoring (hopefully) unimportant details while doing economic analysis. Abstraction is an essential feature of the scientific method. Hypothesis verification, model construction, and comparative static analysis are not possible without abstraction.
Abstracting from the details of the real world is essential to the study of economics and any other scientific endeavor. The scientific method would not, could not, exist without abstraction. For example, a market graph is NOT an actual market. It merely represents market activity. Analyzing price changes are easier with the abstraction of a market model.

Unrealistic?

Abstraction is often criticized for not being realistic. This charge is correct. Abstraction is most definitely not realistic. It would not be abstraction if it was realistic. Abstraction is the process of highlighting only relevant information for analysis.

When done correctly, the pursuit of knowledge is greatly enhanced by unrealistic abstraction. For example, when traveling across the country along an interstate highway, a paper road map is a handy, abstract tool. It shows towns and cities along the way, major intersections, rest stop locations, and other important points of interest. However, it ignores unimportant details. It does not show the location of every tree, bush, or blade of grass. This information does not enhance the road trip.

Abstraction Done Right

To be done correctly, abstraction must include important information but ignore unimportant information. Including unneeded details in a theory can be a waste of time. But ignoring relevant information disrupts the scientific method.

For example, analyzing the market for shoes requires information about the price of shoes and the quantity of shoes sold. Ignoring either of these defeats the purpose of the analysis. But what else should be included in the analysis? Sock prices? Shoe polish sales? Buyers' incomes? Gasoline prices? Hair color? Pulse rate?

Methods of Abstraction

Three common abstraction methods used in economics are words, graphs, and equations.
  • Words: One of the earliest methods of abstraction developed by humans is to represent objects and ideas with words. This is a handy way of doing economic abstraction, too. For example, writing the word "frog" on a piece of paper does not mean an actual frog is on the paper. The word only represents the idea of a frog. In the same way, economists use words to represent economic concepts, principles, and relations--such as money or income. The downside to words, however, is that they can have different meanings.

    Does "frog" mean an amphibious creature or a parched throat? How much money did Duncan Thurly make last year? Did he really make money or did he earn income? (Hint: "Making money" for anyone but the government is counterfeiting, which is illegal. In all likelihood, Duncan did not make any money last year.) Words can be confusing, eh?


  • Graphs: Pictures, especially graphical pictures, are often worth thousands of words. Many economic theories are abstractly represented with graphs. While the word "frog" could be misinterpreted as a parched throat, a picture of a frog can be used to represent this amphibious fellow more clearly. Many economic relations lend themselves to graphical pictures, especially lines and curves.

  • Equations: While pictures might be worth a thousand words, they are flat and two dimensional. As such, economic concepts, principles, and theories are often abstractly represented by equations. Graphs are an excellent way of representing relations between two variables, such as the price of shoes and the quantity of the shoes sold. Economics, however, is often interested in more than two things. This is where mathematical equations are useful. Equations are mathematical relations between variables. In principle, equations can represent relations between any number of variables. The relation between three variables Y, X, and Z can be represented by an equation such as:

    Y = 3 + 2X - 4Z.

    This equations shows the connection between X and Y, and between Z and Y. More variables can be added easily to this equation to represent more relations.


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Recommended Citation:

ABSTRACTION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: March 30, 2017].


Check Out These Related Terms...

     | economic analysis | graphical analysis | theory | comparative statics | model | verification | hypothesis | principle | cause and effect | data | empirical |


Or For A Little Background...

     | scientific method | assumption | variables | axiom | seventh rule of complexity |


And For Further Study...

     | sixth rule of ignorance | world view | fallacies | positive economics | economic science | assumptions, production possibilities | pure market economy | pure command economy |


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