Analytical Framework of Modern Economics

The basic analytical framework for an economic theory consists of five aspects or steps:

(1) Specification of economic environments, (2) Imposition of behavioral assumptions,

(3) Adoption of economic institutional arrangements, (4) determination of equilibria, and

(5) Evaluation of outcomes resulting from an undertaken institution. The framework is a framework that uses to deal with daily activities and is used to study particular economic issues and questions that economists are interested in. Almost of all theoretical economics papers adopt this framework. As such, to have a solid training in economics and doing research, it is very important to master this basic analytical framework, specifically, these five steps.  It can helpful at least in the following three aspects:

(1) Help to understand economic theories and their arguments relatively easily.

(2) Help to find research topics.

(3) How to write standard scientific economics papers. 

Understanding this basic analytical framework could have help people classify possible misunderstandings about modern economics, and can also help them use the basic economic principles or develop new economic theories to solve economic problems in various economic environments, with different human behavior and institutional arrangements.

Specification of Economic Environments The first step for studying an economic issue is to specify the economic environment. To perform these well, the description is a job of science, and the characterization is a job of art. The more clear and accurate the description of the economic environment is, the higher the possibility is of the correctness of the theoretical conclusions. The more refined the characterization of the economic environment is, the simpler and easier the arguments and conclusions will obtain. Modern economics provides various perspectives or angles to look at real world economic issues.

Imposition of Behavior Assumptions The second step for studying an economic issue is to make assumptions on individuals’ behavior. Making appropriate assumptions is of fundamental importance for obtaining a valuable economic theory or assessment. A key assumption modern economics makes about an individual’s behavior is that an individual is self-interested. This is a main difference between individuals and other subjects. The self-interested behavior assumptions are not only reasonable and realistic, but also have a minimum risk. Even this assumption is not suitable to an economic environment; it does not cause a big trouble to the economy even if it is applied to the economy. A rule of a game designed for self-interested individuals is likely also suitable for altruists, but the reverse is likely not true.

Adoption of Economic Institutional Arrangement The third step for studying an economic issue is to adopt the economic institutional arrangements, which are also called economic mechanisms, which can be regarded as the rules of the game. Depending on the problem under consideration, an economic institutional arrangement could be exogenously given or endogenously determined.

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