Scientific Method

The scientific method can be separated into six steps:

1. 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.


2. 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.


3. 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.


4. 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.


5. 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.


6. 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.

Scarcity

Here is a closer look at the two sides of 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.

Phenomena

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.