economic theory

Economics

The study of how people produce, trade, and use goods and services. Economists look at how different actors, such as individuals, companies, and governments, interact with one another to maximize the fulfillment of their needs through the use of scarce resources. Economics also includes the study of supply, demand, and the relationship between the two. There are a number of schools of thought within economics. Some major schools are classical economics, which considers the sources of production as well as the role of the Invisible Hand of the market, and Marxism, which considers the exploitation of labor by holders of capital. Other, modern schools of thought include Keynesianism, which emphasizes the role of demand as opposed to supply, and monetarism, which promotes the use of the free market and the considers the role of money supply in economic growth. See also: Macroeconomics, Microeconomics.
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economic theory

the formulation of ECONOMIC MODELS about the relationships between economic variables in order to generate testable hypotheses from these models. Where a HYPOTHESIS conflicts with real world data, then the hypothesis will be amended or abandoned in favour of a better one; where the hypothesis is confirmed by the data, then it can form a valuable guide in the specification of ECONOMIC POLICY. Economic theory aims to produce simplified economic models of real-world economic phenomena by employing a process of logical deduction from sets of initial assumptions about the behaviour of consumers, producers, etc. (often using mathematical analysis). Having specified a hypothesis based upon the economic model, it is then possible to test the hypothesis against empirical data. See HYPOTHESIS TESTING.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
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