Econ 201 1st Edition Lecture 8Outline of Last Lecture 3. office problemOutline of Current Lecture 4, scientific methodCurrent Lecture• Organized thinking about phenomena in the world (economic phenomena for this course)• The “dispassionate development and testing of theories about how the world works.” - N.G. Mankiw • Understanding not just facts about the world, but how the world works.CausalityCartoon notes: “Baby Blues” – no theory here; “Newton” – theory expressed in his equation.Inference Establishing new truths based on what we already know to be true.- Inference uses the intellect rather than direct observation to discover truth. - This is the process of reasoning, of thinking clearly and critically.- Two Methods of Inference: Inductive and DeductiveInductive: Moving from particular examples of truths to a more general truth. Moving from the plane of the Singular to the plane of the Universal.Ex. Every person born before 1850 is now dead. All people are mortal.Ex. Every time I touch glowing metal I get burned.All glowing metal will burn me. Baby Blues: All pets die within a week.Inductive inference can also be based on analogy: Similar caseSimilar outcomeDeductive: Using rules of logic to deduce a new truth from previously established truths. A Syllogism.Ex. All people are mortal. Jane Smith is a person. Jane Smith will eventually die.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Two Illustrations: Physics – Law of Gravity Economics – Law of DemandInduction – PhysicsObservation is the time it takes for objects to fall a given distance.1 Use various objects and record the time. Object 1: 3.4 seconds; object 2: 3.4 seconds; object 3: 3.4 seconds; etc.All objects will fall the distance in 3.4 seconds. A general rule.Observing each falling time gives a particular truth. The rule is a new truth arrived at without observing fallingtimes of all other objects.Testable Implication (hypothesis or prediction): Any object will fall the distance in 3.4 seconds. Run the experiment to confirm or reject the hypothesis. Is the prediction correct?Induction – EconomicsTestable Implication: If P = $.80 then Q will be less than 18,000.“Run the experiment” to confirm or reject the hypothesis. Realistically, hope that P rises to $.80 and observe the result on quantity. Is the prediction correct? Such situations are sometimes called “natural experiments.”Deduction – Physics: Isaac Newton’s Theory of Gravitation: F = G × m1m2 r2Where: F = force of attraction; G is the gravitational constant; m1 is mass of one object (like the earth); m2 is the mass of the second (an object we will drop), and r is the distance between the objects. (Measured from their centers.)- All objects with mass are attracted to one another.- Falling to the earth’s surface is a result of this attraction.- The strength of gravitational attraction determines the rate of fall. (See next section for the details of such a calculation.)Testable Implication: Any object will fall a given distance in the same time. Run the experiment by dropping Objects and measuring the time of falling.Extension using Newton’s Theory- Strength of gravitational attraction increases with mass.- The moon is less massive than the earth, so objects will fall slower there.Testable Implication: Objects will fall more slowly on the moon. (See next section for the calculations.) - Running the experiment requires going to the moon.- Induction regarding falling objects on the moon would require multiple observations there.This example reveals the power of theory in providing deductive inferences. The truth about objects falling on the moon is revealed without direct observation of any objects falling on the moon. We don’t have to go there. But we would have to go there to test the theory, or find some other means of direct observation.Deduction – Economics- Consumers seek maximum satisfaction from their budgets.- Consumers can substitute one good for another by changing their spending patterns.- If the price of one good rises, satisfaction is improved by consuming less of that good. Law ofDemandTestable Implication: If price of natural gas rises, then quantity purchased will decrease. “Run the experiment.” Observe how Quantity purchased responds to changes in Price.Extension: Conclusions apply to all consumer goods. We don’t have to perform induction for each
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