Quantitative economics deals with the disciplined observation and measurement of economic phenomena. Its objective is twofold: to test economic theories by comparing them with facts and, where theories are found to be valid, to measure the economic relationships implied by them. Our ability to understand economic behavior, to predict its response to changed conditions, to forecast its course in the future, and to alter or control it as a matter of business or public policy depends on the union of valid theory with accurate measurement.
The familiar demand schedule of the beginning economics course is a good example. Economic theory selects price and quantity sold as two important facts of market activity. These are then fitted together in a demand schedule showing how much will be bought at each price. This schedule can be represented by a table in which high prices are matched with small quantities and low prices with large quantities, or we can draw a graph of the demand curve and discuss market behavior in terms of its shape, its elasticity, and the way it shifts on the chart. The student learns, for example, that an increase in supply lowers price, and, for a given increase, price will fall more, the lower the elasticity of demand.
This theory establishes a basis for the analysis and prediction of market conditions, but we need more than abstract theory. In the first place, theories can be wrong. The wrong factors can be assigned to important roles, or key factors can be overlooked, or the theory can push