Chapter 1

The Scientific Method: Step-by-Step test leads us to either

(1) reject the hypothesis, or theory, if it predicts worse than the best alternative theory or (2) use the hypothesis, or theory, until a better one comes along. If we reject the hypothesis, we can try to go back and modify our approach in light of the results.

The Scientific Method

A hypothesis is rejected if it does not predict as accurately as the best alternative. A rejected hypothesis can be modified or reworked in light of the test results.

The Role of Theory

All of us employ theories, however poorly defined or understood.

Behavioral assumptions

The primary behavioral assumption is rational self-interest

A variable

a measure that can take on different values at different times. The variables of concern become the elements of the theory.

An economic theory, or economic model

a simplification of economic reality that is used to make predictions about cause and effect in the real world. A theory, or model, such as the circular-flow model, captures the important elements of the problem under study but need not spell out every detail and interrelation.

Step Four: Test the Hypothesis

by comparing its predictions with evidence, we test the validity of a hypothesis. To test a hypothesis, we must focus on the variables in question, while carefully controlling for other effects assumed not to change.

Step Two: Specify Assumptions

other-things-constant assumption—in Latin, the ceteris paribus assumption. The idea is to identify the variables of interest and then focus exclusively on the relationships among them, assuming that nothing else important changes—that other things remain constant.

The third step in the scientific method is to formulate a hypothesis,

which is a theory about how key variables relate to each other. For example, one hypothesis holds that if the price of Pepsi goes up, other things constant, then the quantity purchased declines. The hypothesis becomes a prediction of what happens to the quantity purchased if the price increases. The purpose of this hypothesis, like that of any theory, is to help make predictions about cause and effect in the real world.