1.2 How do economists approach the world?

What is positive economics?

Positive economics deals with objective, factual statements about how the economy works. These statements can be tested and proven true or false.

What is normative economics?

Normative economics is based on value judgements and opinions about what economic policies should be. These cannot be proven true or false.

What is the role of positive economics?

It uses logic, models, and assumptions to make factual statements about economic behaviour with greater reliability.

What does 'rational decision making' mean in economics?

The assumption that economic agents (consumers, producers, workers, governments) act logically to maximise their own benefit (utility, profit, welfare).

Why is rational decision making considered flawed?

Because in reality, decisions are often influenced by emotions, impulses, or other irrational factors.

What is the social scientific method?

A research method used in economics where hypotheses are tested with empirical evidence (observations, surveys, data), though results may vary due to human complexity.

What is refutation in economics?

The process of disproving a statement or theory using empirical evidence.

What are economic models?

Simplified versions of reality used to explain relationships between variables, based on assumptions about behaviour and outcomes.

Why are assumptions important in economic models?

They simplify complex human behaviour and interactions to make analysis possible.

What does ceteris paribus mean?

A Latin phrase meaning "all other things being equal"; used to isolate the effect of one variable by holding others constant.

What is the role of normative economics?

It shapes government policies and choices, as value judgements influence what is considered fair or desirable.

What is equity in economics?

Fairness in the distribution of resources within a society.

What is equality in economics?

The state where everyone has equal recognition or opportunities, often treated as a normative concept.

Understanding the evolution of economic thought

Helps to understand the strengths and weaknesses of current economic policies

Laissez-faire economics

Belief in minimal or no government intervention in resource allocation and production

Invisible hand

Free market forces of demand and supply allocate resources efficiently through self-interest

Free trade

Removal of protectionist barriers to increase production, trade, and wealth

Wealth (Adam Smith)

Wealth is created by production; individual wealth leads to national wealth

Classical microeconomics (utility)

Prices are determined by the satisfaction (utility) gained in consumption, not only costs of production

Marginal utility

Additional satisfaction gained from consuming one more unit of a good

Total utility

Sum of marginal utility from all units consumed

Say’s Law

“Supply creates its own demand”; production generates income to purchase more goods

Karl Marx’s critique of capitalism

Capitalism exploits workers, deepens inequality, and leads to instability and revolutions

Command economy (Marx)

Government allocates resources to prevent worker exploitation and inequality

Keynesian economics

Advocates government intervention through fiscal policy to stimulate demand and stabilise economies

Fiscal policy (Keynes)

Government spending and taxation used to influence aggregate demand and output

Limitations of markets (Keynes)

Markets may remain in disequilibrium without government intervention

Monetarism

School of thought emphasising monetary policy as key to managing the economy

Milton Friedman (Monetarism)

Advocated limited government spending, focus on supply-side policies, and control of money supply

Supply-side policies

Policies aimed at increasing productive capacity, e.g. privatisation

Behavioural economics

Combines psychology and economics to explain decision-making beyond rational assumptions

Nudge theory

Using choice architecture to guide individuals toward better economic decisions

Circular economy

Economic model based on eliminating waste, recycling products, and regenerating nature

Critique of circular flow model

Too focused on money flows; ignores environmental and social sustainability

Understanding the evolution of economic thought

Helps to understand the strengths and weaknesses of current economic policies

Laissez-faire economics

Belief in minimal or no government intervention in resource allocation and production

Invisible hand

Free market forces of demand and supply allocate resources efficiently through self-interest

Free trade

Removal of protectionist barriers to increase production, trade, and wealth

Wealth (Adam Smith)

Wealth is created by production; individual wealth leads to national wealth

Classical microeconomics (utility)

Prices are determined by the satisfaction (utility) gained in consumption, not only costs of production

Marginal utility

Additional satisfaction gained from consuming one more unit of a good

Total utility

Sum of marginal utility from all units consumed

Say’s Law

“Supply creates its own demand”; production generates income to purchase more goods

Karl Marx’s critique of capitalism

Capitalism exploits workers, deepens inequality, and leads to instability and revolutions

Command economy (Marx)

Government allocates resources to prevent worker exploitation and inequality

Keynesian economics

Advocates government intervention through fiscal policy to stimulate demand and stabilise economies

Fiscal policy (Keynes)

Government spending and taxation used to influence aggregate demand and output

Limitations of markets (Keynes)

Markets may remain in disequilibrium without government intervention

Monetarism

School of thought emphasising monetary policy as key to managing the economy

Milton Friedman (Monetarism)

Advocated limited government spending, focus on supply-side policies, and control of money supply

Supply-side policies

Policies aimed at increasing productive capacity, e.g. privatisation

Behavioural economics

Combines psychology and economics to explain decision-making beyond rational assumptions

Nudge theory

Using choice architecture to guide individuals toward better economic decisions

Circular economy

Economic model based on eliminating waste, recycling products, and regenerating nature

Critique of circular flow model

Too focused on money flows; ignores environmental and social sustainability