AN ASSESSMENT OF THE ECONOMIC WAY OF THINKING
(Student ID # 30100872)
July 23, 2013
BSM407: Business Economics
Dr. William Middleton
The main goal of economics is to reconcile the unlimited wants of an individual or society and the scarce resources that they have to satisfy these wants and needs. Whenever resources—categorized into three major groups namely land, labor, and capital—are not efficiently used, economists see this as a problem and they try to come up with solutions. The economic way of thinking is the prescribed way of solving real world problem which involves the following steps: (1) identifying the problem, (2) developing a model based on simplified assumptions, and (3) collecting data that will either support or reject the proposed model. PRESCRIBED WAY OF THINKING
Given that economics deals with managing resources, economic problems are not limited to topics found in academic journals or news about government but it can be found anywhere---from seemingly mundane topics in magazine articles, television, household life, and, though more obvious, in running a business. It is important to make the issue as clear as possible when proceeding with analyzing the economic problem in order to make the proper assumptions necessary for the next step which is model building. When building a model economist prefer including less rather than more variables when explaining the variable under study, but they are also careful not to leave out the important factors. The practice of using the simplest explanation is also used by other disciplines and is referred to as Occam’s (also called Ockham’s) razor. As Hal Varian, a prolific economist, points out: when building a model “write down the simplest possible model you can think of, and see if it still exhibits some interesting behavior. If it does, then make it even simpler. The whole point of a model is to give a simplified representation of reality. A model is...
References: Mankiw, G.R. (2007). The Sociology of Economics. Retrieved from http://gregmankiw.blogspot.com/2007/08/sociology-of-economics.html
Tucker, I.B. (2014). Economics for Today. Mason, OH. South-Western.
Varian, H.R. How to Build your Economic Model in Your Spare Time. Retrieved from http://people.ischool.berkeley.edu/~hal/Papers/how.pdf
Wikipedia. (n.d.). Ockham’s Razor. Retrieved from http://en.wikipedia.org/wiki/Occam 's_razor
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