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Economics is the social science that focuses on the behavior of organizations, groups of people, and individuals that manage (use, allocate, accumulate) resources. Microeconomics studies the behavior of individuals and small groups managing scarce resources. It is necessary to note that economics uses a scientific method which helps to achieve “accurate representations of reality” (Wetzstein 12).
Thus, researchers define variables, factors which are exposed to changes and try to understand the correlation between the variables. Thus, the hypothesis is an assumption that variables correlate in a certain way, and researchers try to find evidence which could prove that the correlation exists.
It is necessary to note that economics faces certain social science challenges. Thus, in natural sciences, researchers often employ controlled experiments, but the natural experiment is mainly used in social sciences (Arnold 17). It can be explained easily as economics studies different processes and trends in the society, and it is impossible to check a hypothesis in laboratory conditions as all trends and concepts have to be observed within the society.
It is also important to add that there are several theoretical approaches exploited in economics. Different researchers have focused on certain principles, factors, and variables, which led to the development of numerous approaches (Tucker 280). Researchers have been interested like prices and product system, their allocation, and restoration. One of the approaches which had a great impact on the development of economics was Classical Political Economy (CPE).
Thus, the ‘correct’ prices are set to allocate commodities to optimal social welfare (Tucker 756). The government plays an important role in this process, and the economy is regulated significantly. Another important approach is the neoclassical economy. According to this approach, the price depends on “market demand and supply curves” (Wetzstein 17).
In other words, prices are set by demand and supply, and cannot be regulated by the government (if the two factors mentioned above are ignored). Another influential theoretical model is labor production-based economy, which stresses the correlation between prices and labor production (Mankiw 24).
The exchange-based approach is another model based on the assumption that people are willing to substitute goods by other goods (Mankiw 57). Assumed convexity of preferences is one more approach which has gained much popularity. According to this model, the average “well-balanced commodity bundles” are preferred to extreme or unbalanced bundles (Wetzstein 46).
Finally, the concept of endowment plays an important role in modern economics. Supporters of this approach note that people tend to value certain endowment when they own it (Arnold 167). At that, it is believed that people tend to value different commodities, and it is possible to achieve optimal commodities allocation. Therefore, it is believed that flexible prices help achieve the optimal allocation of commodities and minimize (or eliminate) unconsumed commodities.
The free market is seen as the necessary mechanism for setting fair prices and achieving optimal allocation of commodities. It is possible to note that the approaches mentioned above mainly focus on setting prices and exchanging goods. They are based on the scientific method as researchers point out hypotheses and reveal correlations among variables.
Econometrics is another (and a more specific) example of the use of the scientific method in economics. It is necessary to note that researchers utilize real-life data to test their hypotheses (Wetzstein, 13). Furthermore, researchers provide their recommendations based on their analysis, and these recommendations can be employed in society. The major focus of economists who use econometrics is the causal effects of different trends or events. It is possible to consider two examples to understand the way econometrics works.
Hence, in the early 1990s, New Jersey passed a law to increase the state minimum wage. The question raised was whether there was a correlation between the increase in the minimum wage and the rate of unemployment. Conventional wisdom holds that the increase in minimum wages will lead to an increase in the unemployment rate. At this point, it is necessary to add that the correlation will exist if the market remains competitive, the minimum wages will be set for all workers, and the workers’ productivity does not change.
To reveal the correlation, econometric research was held. Researchers analyzed employment in several fast-food restaurants before and after the minimum wage increase. The researchers found that the rate of employment increased after the increase in minimum wages. It is also important to add that the researchers found out that employers had paid more than the new minimum wage before the new law.
Employers could pay less and hire more people as they could refer to the law of minimum wages. Hence, new laws concerning wages should take into account these factors as well. Therefore, econometrics enables researchers to understand better processes which are taking place in society. It also helps economists develop effective strategies and policies to solve issues existing in society.
Another interesting example of the effectiveness of econometrics is the correlation between unemployment insurance and unemployment rate. The conventional theoretical prediction is that the increasing unemployment benefits will lead to an increased unemployment rate. Econometric research found that extending unemployment benefits did not affect the rate of unemployment significantly.
However, there was s a strong correlation between the increase in unemployment benefits and the way people searched for new jobs. Thus, extending these benefits leads to a lower pace of job search. These data can help develop effective policies to encourage people to find jobs more quickly and, at the same time, to help people cope with their financial constraints.
To sum up, it is possible to note that economics operates like any other branch of social studies as it uses the scientific method. Economists come up with hypotheses and check them with the help of empirical data. Remarkably, theory and practice go hand in hand when it comes to economics. This helps economists understand the changes and latest trends in society and enables them to come up with certain strategies to achieve proper development of society.
Works Cited
Arnold, Roger A. Microeconomics. Mason, OH: Cengage Learning, 2013. Print.
Mankiw, N. Gregory. Principles of Microeconomics. Stamford, CT: Cengage Learning, 2014. Print.
Tucker, Irvin. Economics for Today. Mason, OH: Cengage Learning, 2012. Print.
Wetzstein, Michael E. Microeconomic Theory: Concepts and Connections. New York, NY: Routledge, 2013. Print.
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