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Methods Laws and Assumptions in Economic Theory
Methods Laws and Assumptions in Economic Theory

Methods of scientific study

There are two methods of way of thinking in theoretical economics. They are the deductive and inductive methods. As a matter of fact, deduction and induction are the two types of logic that help to institute the truth.

The Deductive Method

Deduction means interpretation or implication from general to the particular or from the universal to the individual. The deductive method develop new finale from elementary hypothesis or from truth recognized by other methods. It engrosses the process of analysis from certain laws or principles, which are supposed to be true to the analysis of facts. This involves four steps.

  • Selecting the Problem - The problem which a researcher plump for, for enquiry must be fixed clearly. It may be very broad like redundancy, scarcity, price rises etc. or tapered relating to an industry.

  • Formulating Assumptions - The next step in deduction is the outlining of postulations which are the basis of propositions. To be productive for survey, the assumptions must be general.

  • Formulating Hypothesis - The next step is to formulate a hypothesis on the basis of logical reasoning whereby conclusions are drawn.

  • Testing and Verifying Hypothesis - This is the final step of deductive method, to test and verify the hypothesis. For this purpose, economists use statistical and econometric methods. Verification consists in corroborating whether the hypothesis is in agreement with facts.
Merits of Deductive Methods

Real method is the method of academic research, because the real world is very complex. What we do is hypothesize in our own minds fiscal systems which are simpler than reality but easier to clutch. Simple deductive method is simple because it is logical. It involves generalization and simplifies a complex problem into simpler parts. Powerful method of scrutiny is for deducting conclusions from certain facts. Exact method is use of statistics, mathematics and econometrics in deduction carries exactness and lucidity in economic analysis. Indispensable method is use of deductive in indispensable sciences like economics where carrying out tests is not possible.

Demerits of Deductive Methods

Assumptions are not sensible that is based on facts. Hence it is not acknowledged universally. The verifications might be erroneous due to change in market condition with respect to theory applied. It is said to be abstract since economic conditions are not static and hence it is difficult to make analysis based on theories.

The Inductive Method

Induction is the process of way of thinking from a part of the intact, from details to general from the individual to the widespread. The inductive method involves the following steps.

  • The Problem - In order to appear at a simplification relating to an economic occurrence, the dilemma should be correctly selected and clearly stated.

  • Data - The second step is the compilation, enumeration, categorization and investigation of data by using suitable statistical techniques.

  • Observation - Data are used to make surveillance about particular facts relating to the problem.

  • Generalisation - On the basis of inspection, generalised is logically derived which establishes a general truth from particular facts.
Merits of Inductive Method

Inductive method is sensible since it is based on real facts. It helps in prospect investigation. Once simplification is recognized, it becomes the initial point of potential investigation. It makes use of a statistical method. This has made considerable enhancement in the application of induction for analysing economic problems. This method is dynamic. Based on the past experiences, change in fiscal condition can be handled and appropriate methods can be taken. Thus induction suggests new problems to clean theory for their solution from time to time.

Demerits of Inductive Method

However the inductive method is not without its weaknesses which are discussed here. There may be a probable misrepresentation of data. As per the statistical information, the finale framed out is unsure. It lacks compactness. Since the researchers use different definition, concepts and theories relating to a problem, the statistical technique lacks concreteness. It is a costly method and time consuming. It is difficult to prove postulation, and cannot prove a hypothesis. It is not reliable as it is based on some data. In reality, collection of data is not informative unless it is related to a hypothesis.

Assumption of Economics

Economic theories are based on assumptions which are broadly classified into four groupings.

  • Psychological or Behavioural Assumptions - These assumptions are about the individual human behaviour. They refer to reasonable behaviour of individuals as clients and manufacturer

  • Institutional Assumptions - These assumptions in economic theory relate to social, political and economic establishment. All theories are developed based on the capitalist economy assumptions.

  • Structural Assumptions - These assumptions relate to nature, physical structure or landscape of the economy and position of technology. These assumption relate to a static economy and dynamic economy whichever applicable.

  • Ceteris Paribus Assumptions - It means 'things being equal' assumption. In order to judge the impact of one feature at a time, the other features are held invariable.

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