1.2 - economic methodology

Economics

the study of how to allocate scarce resources in the most efficient way. 

Microeconomics

the study of individual markets, which involve households and firms.

e.g. the market for cars - the behaviour of buyers and sellers of cars.

Macroeconomics

the study of the economy as a whole.

e.g. the causes of unemployment in a country.

Economics is a social science. The ‘Social’ aspect is because _ ?

economics looks at human behaviour, particularly in relation to satisfying human needs and wants. 

Economics is also a “Science” because _ ?

like scientists, economists put forward and investigate theories that seek to explain the ever changing global economy. 

These theories are referred to as models - a simplified view of reality that is used to explain economic problems and issues. 

Model

a simplified view of reality that is used to explain economic problems and issues. 

Positive statement

a statement that is based on facts or empirical evidence. 

Normative statement

a statement that is based on the economist’s opinion or value judgement and which cannot be proven. 

Ceteris paribus

a Latin phrase meaning ‘other things remain equal’ or ‘other things are unchanged’.  It is used by economists to model the effects of one change at a time. 

e.g. in analysing the effect of a change in price on the demand for ice cream, it is assumed that all other factors (e.g. weather, income) do not change. 

The margin

a small change in one variable will lead to further (small) changes in other variables.

Using the margin to analyse issues enables economists to predict what the likely impact of change might be.

e.g. a change in consumer income will lead to further changes in consumer spending. 

Give an example of how decision-making by consumers, firms and governments is based on choices at the margin. 

For example, firms will produce up to the point where the revenue generated by an extra unit of output is equal to the cost of producing it.

Short run

the time period when a firm can change at least one but not all factor inputs. 

e.g. a firm can increase production by employing more labour but capital remains constant. 

Long run

the time period when all factors of production are variable but with a constant, such as the state of technology.

e.g. a firm can increase production by employing more labour, purchasing more land or building a new factory. 

Very long run

the time period when all key inputs into production are variable.

 e.g. technology, government regulations and social concerns.

Time periods do not have an exact timescale such as three months or one year. 

The timescale depends on _ ?

whether any or all of the factors of production can be changed.