GMS 402 Lecture 12: GMS 402 FINAL
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The purpose of theory is to predict and explain. A theory is a hypothesis that has been successfully tested. Hypothesis is tested based on accuracy of prediction, and that outcome is based on the assumptions. Based on observation if the price of cut meat increases, we buy less of it. Based o(cid:374) the o(cid:271)se(cid:396)(cid:448)atio(cid:374), (cid:449)e (cid:272)a(cid:374) (cid:272)o(cid:374)st(cid:396)u(cid:272)t a h(cid:455)pothesis (cid:862)if the p(cid:396)i(cid:272)e of a (cid:272)o(cid:373)(cid:373)odit(cid:455) rises, then the quantity demanded of the (cid:272)o(cid:373)(cid:373)odit(cid:455) de(cid:272)li(cid:374)es(cid:863). A theory after the hypothesis has been tested. Scarce is associated with word limited or economic as opposed to unlimited or free. Economic resources are of various types - labour, capital, land and entrepreneurship. Since these resources are scarce, production is limited. Because of scarce resources, societies face the problem: what to produce, how to produce, for whom to produce, how to ration the commodity over time, how to ensure sustainable growth. These problems are resolved through price mechanism in a free economy.