The Methodology of Positive Economics Constructing a theory

The Methodology of Positive Economics

Constructing a theory • • Law of demand Law of diminishing marginal return 畢氏定理 秋官定理

Assumptions may be unrealistic • 其他因素不變 • 只有兩個國家、兩種貨物 • 人是自私的 A simplification of reality

It is refutable by evidence but not refutable. (有機會被推翻但仍未被推翻) • Some theory cannot conceivably false. • e. g. tautology

A tautology is a statement that cannot be falsified in all situations.

The statement includes all possibilities. 十二碼，一係 入一係唔入！

The statement merely restates the situation in other wordings. • Four legged animals have four legs. • There would be no unemployment if everyone has a job. • The quantity supplied of vegetables increases as more quantities are available for sale.

Although a tautology is always true, it is neither useful in explanation nor in prediction.

The theory is potentially refutable by facts • 四腳動物有四隻腳。 • 四腳動物是黑色的。

• Which of the following is a tautological statement? 02/18 A. The price of seafood will go up if its supply is reduced. B. Bond price will be affected by interest rate fluctuations. C. Market equilibrium will be attained when the quantity demanded is equal to the quantity supplied. D. The crime rate will fall when heavier penalty is imposed on criminals.

• A theory with an indefinite number of possible outcomes 00/26 A. is more general in application. B. is easier to refute. C. has no refutable implication D. is more realistic.

Variables in theory must be observable Implication 地球現在自轉的方向不變，太陽會從東面升起。 Variable

A testable implication requires 05/02 A. the support of an unrealistic theory B. at least one observable variable C. at least two observable variables D. no observable variables because observations are always subjective in nature

Great predictive(推測)power, NOT forecasting(預測)power ü Prediction: üe. g. derived from a theory üIf given conditions are met, certain events will happen ü 若狄士尼將入場人數上限定在 30000人，每人輪候space mountain的時間至少需要一小時。 ü Forecast: ügot from observing trend of past events ü 將有大量的自由行人士、喜歡新鮮的香港人入場，故狄士 尼每人輪候space mountain的時間至少需要一小時。

闊 Tautology 窄 Ad hoc theory

闊 Tautology 窄 Ad hoc theory

The theory is potentially refutable by facts 地球現在自轉的方向不變， • A theory can never be 太陽會從東面升起。 proved correct. • Tests of a theory can only Theory be used to confirm or reject theory. • A useful theory is one which might be wrong, which is Test rejected not always true, and which can be refuted by empirical evidence. • An economic theory is useful because it is Confirmed refutable by evidence but not refuted.

What can we do if a theory is really refuted by the facts? Theory Test Adding assumptions Rejected Replaced by a better one Confirmed

Economic theory is useful because 95/07 A. it is proved by evidence. B. it is refuted by evidence. C. it is refutable by evidence but not refutable. D. its assumptions are realistic.

• Which of the following is NOT an attribute of a useful economic theory? 97/01 A. The theory is always true. B. The implications of theory are refutable by facts. C. The postulates may be unreal. D. The theory is logically consistent.