How does applying econometrics to economics validate economic decisions for an organization? Support your response with an example.
Econometrics is the study of economic theory in its relations to mathematics and statistics. The essential premise is that economic theory lends itself to mathematical formulations, which includes random variables. Econometrics helps to estimate the relations that constitute the economic theory.
Business organizations use these econometrics tools to analyze their businesses including profit, growth, and loss among others. Econometrics helps them to formulate a practical plan and to forecast future outcomes on the basis of certain present scenarios. Whether too introduce another product or not, whether to operate and to what limit to operate under loss, what quantities to sell and at what price, effect of random variables on the model are some questions to which answers are provided by using the tools/models of econometrics.
An example of this will be the probability approach in econometrics and it is used as a statistical tool to validate mathematical theories in the organization.