AD-AS MODEL: An economic model relating the price level and real production that is used to analyze business cycles, gross domestic product, unemployment, inflation, stabilization policies, and related macroeconomic phenomena. The AS-AD model, inspired by the standard market model, captures the interaction between aggregate demand (the buyers) and short-run and long-run aggregate supply (the sellers).
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The application of the scientific method to economic phenomena and topics related to the fundamental problem of scarcity. Economic science, also termed positive economics, is one of several social sciences that apply the scientific method to the study of human behavior. Economic science is the scientific study of economic phenomena. While the scientific process is commonly associated with lab coats and test tubes (and the study of physical science) it is also directed toward social and human behavior in the form of social science. Economic science is a social science that uses the scientific method to explain and understand how human behavior responds to the scarcity problem.
Scientific MethodEconomic science, like any science, uses the scientific method to understand how the world works. The scientific method is a systematic way of explaining phenomena by verifying theoretically derived hypotheses with real world data.
The scientific method can be separated into six steps:
- First, generally accepted principles form a theory. This can be a highly formal theory, involving a lot of sophisticated mathematical equations. Or it could be quite simple, based on a few "common sense" notions about the world. The market is one noted economic theory. It can be specified as words, graphs, or equations.
- Second, the theory inspires a hypothesis. A hypothesis is a very specific statement about how the world works that logically follows from the theory. For example, the market theory implies that an "unnaturally" low price, such as that caused by a government price ceiling, causes a shortage.
- Third, the hypothesis is verified with real world data. The hypothesis, which states what a theory implies will occur, is compared with real world data, which documents what actually does occur. If the market theory implies a government imposed price ceiling causes a shortage, then this can be checked against a real work market.
- Fourth, if supported, a hypothesis becomes a principle. However, to become a principle, the hypothesis must be verified many, many, many times. Once is not enough. The more that a hypothesis agrees with real world data, the more confident economists are that it captures a fundamental law of nature. As confidence builds, it moves from hypothesis to principle. The hypothesis that a price ceiling causes a shortage has been tested enough that economists are confident that this explains a fundamental aspect of the economy.
- Fifth, the new principle is added to the theory. The verified principle uncovers something new about the world, something that was not previously understood, something that can be used to generate another hypothesis. This new bit of information is then added to the original theory to create a bigger, better theory--a theory that can explain even more about the world. For example, a government imposed price ceiling implies the emergence of an illegal black market. This hypothesis can also be tested against real world events.
- Last, the new, improved theory, being bigger and better, inspires yet another hypothesis about another aspect of the world that has not yet been explained. This new hypothesis then goes through the same data verification process on its way to becoming another new principle. For example, an understanding of price ceilings, shortages, and black markets can be used to explain and analyze the market for illegal drugs or other criminal activity.
ScarcityEconomic science stands apart from other types of science (social and physical) because it studies phenomena related to the fundamental problem of scarcity. Scarcity is the pervasive condition facing humanity that arises because wants and needs are unlimited, but resources are limited.
Here is a closer look at the two sides of the scarcity problem.
Economics is essentially the study of scarcity. Everything and anything studied in economics ultimately harkens back to the scarcity problem.
- Unlimited Wants and Needs: This is a basic characteristic of humanity which means that people are never totally satisfied with the quantity and variety of goods and services. It means that people never get enough, that there is always something else that they want or need.
- Limited Resources: This is a basic condition of nature which means that the quantities of available resources used for production are finite. It means that the economy has only so many resources that can be used AT ANY GIVEN TIME to produce goods and services.
PhenomenaAlthough the central thread running throughout the study of economics is scarcity, the specific phenomena studied by economic science is exceedingly diverse. It includes such topics as stock prices, environmental quality, foreign trade tariffs, criminal activity, discrimination, money creation, and bureaucratic inefficiency.
The topics are commonly divided into the branches of macroeconomics and microeconomics.
- Macroeconomics studies the aggregate economy, including topics related to business-cycle instability, such as unemployment, inflation, the money supply, and stabilization policies.
- Microeconomics studies consumers, producers, markets, industries, and parts of the economy, including topics such as market control, efficiency, market shortages and surpluses, short-run production, and consumer demand.
ECONOMIC SCIENCE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 25, 2024].
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