Criteria of a GOOD Theory

1
Theory
Cont
Warning
The topic is purely theoretical and could be very
very boring.
BE PATIENT!
2
Criteria of a GOOD Theory

• Usefulness
• Applicability
• Simplicity

3
Usefulness

• Logically consistent or deductively valid
• Refutable or conceivably false
• - prediction can be rejected by evidences
• - prediction is restrictive (not including all
  possible outcomes)
• Prediction the price of textbooks will rise ,
  fall or remain unchanged.

4

• Has not been refuted
• Postulates (??) can be unreal

International Trade Theory ASSUME 2 COUNTRIES
5

• Testable

Test conditions and predictions are observable.
Why ?
Law of diminishing Marginal Returns if variable
factor is added continuously to a given amount of
fixed factors, marginal output eventually
decreases..
Test condition amount of variable factor
increases
Predictions marginal output decreases finally
6
Tautology ????

• A statement that cannot be falsified in all
  situations.
• (always true), not useful in explanation, not
  useful in prediction

7
Tautology
e.g. He is either handsome or ugly.
Prediction includes all possibilities
e.g. No one hands in homework late if everyone
hands in homework on time.
Prediction merely restates the situation in other
wordings.
8
Ad Hoc Statement
A statement that can only be applied to and
explain one situation.
Explain Why there is SNOW?
TAKE water up to Mount Himalayas
Take the water up Hill
Take water up to a hill of 1000 feet.
Take water up to the top of TAI MO SHAN
Take water up to the top of Hamalayas with degree
lt 0oC
Take water up to the top of Hamalayas with degree
lt 0oC and pour it
Get some water and it becomes snow
9
Prediction VS Forecast ?? ??

• Prediction
• An implication derived from a theory, supported
  by a theory
• Forecast
• Wild guess, not supported by a theory/ reasonable
  explanation.
• e.g. fortune telling.

Economics Theory
Prediction
10
Simplicity

• Why?
• Real world -- too complicated
• Cant include all the situation in a theory
• Simplify --gt explanatory power

11
Taste
Price
What can we tell?
Qd
INCOME
OTHERS
Substitutes
Compliments
12
Applicability