Economic Theory sample essay

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Two of the primary tasks in the world of Economics are prediction and evaluation. This assignment illustrates, at a rudimentary level, how models, techniques and methods constructed or borrowed from Economic Theory or other Sciences respectively are used to help accomplish these tasks. To do so, we consider a standard theoretical model of consumer choices in an economy in which the only activity is the exchange of goods.

Due to the above-mentioned we can say that the most powerful technique used to predict the consequences of policies or future trends is modeling. A model is an abstraction intended to convey the essence of some particular aspect of the real world. Most economic models assume the existence of adequate information, yet information is a costly and scarce resource. Good models predict well enough to increase our understanding of certain situations, even though they may not predict them perfectly and there may be related situations in which the same models do not predict as well as expected. Last but not least there are models that constructed without using any numerical data; these are based entirely on economic theory.

We shall begin by looking at some of the ways in which forecasting techniques can help us to predict future trends. Most business and economic decisions rest upon forecasts of future conditions. Methods of forecasting may be roughly categorized as follows:

* Opinion polling

* Mechanical extrapolations

* Barometric techniques

* Statistical and econometric methods

Finally, forecasting techniques vary widely in their accuracy and sophistication. The most accurate technique is to be preferred, subject to the availability of data, expertise and finance and to the nature of the forecast required.


The assumption here is that by asking people who are likely to be directly involved, such as consumers or the sales force, attitudes and opinions which affect economic decisions can be assessed and predicted in advance. Opinion polling is a subjective method of forecasting made up largely of a weighted or unweighted averaging of expectations and attitudes.

This general idea of developing informed and deliberated polling opinion has had a relatively length history successful experimentation beginning roughly during the 1970s in the U.S.A. In statistics polling is about probability sampling. A good poll:

locates people who fairly represent the population we’re interested in;

asks them fair, comprehensible and useful questions;

calculates results fairly, without reaching beyond the data;

and is reported so people can understand where it does and does not apply.

The importance of opinion polling and the way it can be done is shown in the below Figure:

Opinion polling is a very powerful technique used to predict future trends. Based upon probability sampling it can give people many answers upon many problems in the society. Depending on the size of the sample, the results are relatively accurate, scientific representation of the entire public’s considered opinion on perplexing issues.

Today there are a lot of companies which provide a wide variety of consultancy services and offer top quality research based solutions to their clients’ problems. They also provide full service market research process, from defining research objectives through analysis and presentation of data. To achieve their goals they use research methodologies, advanced statistical analysis and strategic relevant and decision reports. Their credibility and reputation is reflected in the fact that their publicly released findings are regularly quoted by the media (press, radio and television). Additionally, these companies are leading agencies in Socio-Political public opinion polls and Political Candidate Evaluation research.

Another aspect of opinion polling is exit-poll. For example scientists use exit-poll method to predict who is going to win in elections. The exit-poll method is not 100% accurate, but the error between the real results and the one’s from exit-poll is very-very small. Asking a small sample of population inside a society it can predict whether the conservative of socialist party is going to be elected.

Finally, opinion polling is also used by companies to know which product of theirs is more consumed by people. Asking a small sample of people using questionnaires (more often) they can realize which product of theirs is more consumed by people, which product are less consumed and tries to find means of improvement for others.


This is probably the most frequently adopted method of forecasting. It involves the basic assumption that past patterns of economic behavior continues to the extent that past behavior can be used to predict the future. It has the attraction of also being relatively cheap in that the company is likely to posses most of the relevant historical information. Last but not least, the mechanical methods of forecasting rely on future conditions being an extent of past ones.

Also, this method might consist of taking a time series of historical sales figures, and fitting a trend line to it by eye as shown in the figure below:

This can then be used to read off sales predictions for the required future dates.

To produce this line between the dependent and independent variables of data, as shown in the above figure, the ordinary least-squares (OLS) technique uses a mathematical formula to illustrate this line. However, the technique also produces a measure of the explanatory power of the relationship on the basis of the relationships observed in the original data. A mathematical formula for producing this line is:

Where a and b in this equation have been estimated using regression analysis (a set of statistical techniques used to quantify the relationship between two or more variables).


In addition with mechanical extrapolations, barometric techniques assume that present happenings can give an indication of future events. Also, this technique is based on the observation that there are lagged relationships between many economic time series.

Moreover, to give an indication of future events, there are three types of indicators as far as economic activity. Leading indicators are those which tend to herald future changes in the course of business activity. Coincident indicators move in step with the cycle; examples of these might include aggregate levels of sales, employment and industrial production. Finally, there are lagging indicators, which trail behind the level of economic activity.

Although it is possible to isolate various leading indicators the direction of movements in each does not presage movements in economic activity with complete accuracy. The reason is that the lead-time between their behavior and the ensuing change in economic activity is not likely to be constant.

Nowadays, many companies who want to see which of their product is more consumed by people, they make a statistical figure in order to calculate this. Using barometric techniques they can find which product of theirs is more consumed by people, which is not going too well and try to give improvements for others. So, they can indicate from present happenings, how a product can be in the future.


Science is given as “truth ascertained by observation, experiment, and induction”. The purpose of science known as “statistics” is to provide the means for measuring the amount of subjectivity that goes into the scientists’ conclusions and thus to separate “science” from “opinion”. Hence, statistical and econometric methods, similar to those used in time series regression can be used to analyze the economic relationships between variables.

Many of the firms forecasting problems can be solved with a single equation econometric model. Laws of probability are applied to this model in order to determine what “chances” are for the various possible outcomes of the experiment. The first step in the construction of such a model is to specify the hypotheses, which purport to explain the relationships between the variables. Hypothesis testing is the process of inferring from a sample (a collection of some elements of a population) whether or not to accept a certain statement about the population. The statement itself is called the hypothesis. When the model is constructed it gives the businessman the opportunity of experimenting to test the predicted results of various strategies.

There is a vast variety of companies offering a full-service market research which means the capability to successfully undertake any research project from the conceptual stage through the design, data collection, tabulation, analysis, interpretation of findings, recommendations, and presentation. The projects they undertake span a broad array of industries, types of studies, experimental designs and analytical statistical techniques. They are skilled in the wide variety of quantitative and qualitative techniques, providing their clients with a seamless connection between all phases of the research program. Their full range of custom research for Consumer and Business to Business research includes the following:

* Tracking studies

* Product testing

* Taste testing

* Home-use tests

* Advertising research

* Strategic research

* Product Positioning research

* Concept tests

* Customer satisfaction tests

* Etc.