Economics 1.1.1

Economics as a Social Science

What do economists do with models and what is economics?

Economics is the study of how societies allocate scarce resources to meet unlimited wants.

Economists use models to analyse and simplify complex economic situations.

An example of this is modelling the supply and demand of goods and services in a market.

What are the roles of assumptions in economics?

simplifications used in economic models to focus on one key variable at a time allowing economists to isolate relationships and make analysis manageable.

E.g in PPF models we assume constant technology to understand trade-offs between two goods.

Advantages of Models

framework for understanding economic phenomena

to make predictions, test theories and guide policies.

E.g the supply and demand diagram allows economists to analyse price changes of a good and evaluate market equilibrium which can help a firm maximise revenue.

Limitations of Economic Models

Models are simplifications of reality and may not capture all complexities.

Models can be unrealistic and lead to inaccurate predictions.

For example, the assumption of rational behaviour may not apply to everyone.

What does Ceteris Paribus mean?

Latin for “All else equal” and is used in economics to isolate the effect of one variable while holding others constant.

Give an application of Ceteris Paribus.

In supply and demand models, Ceteris Paribus is used to focus on the impact of price changes while keeping other factors constant.

For example, to study the effect of an increase in the price of smart phones on the quantity demanded, we hold income and consumer preferences constant.

Importance of Ceteris Paribus.

simplifies complex economic relationships and makes them more understandable.

cause and effect relationships between variables.

For example, when analysing the impact of minimum wage rises, ceteris paribus helps isolate the effect on employment while keeping all other factors constant.

Critiques of Ceteris Paribus.

In the real world it is hard to hold all other variables constant.

Changes in one variable often cause a change in another variable making it difficult to isolate relationships.

For example, inflation may affect both the price level and consumer preferences simultaneously, challenging the ceteris paribus assumption.

What are the characteristics of scientific experiments?

A scientific experiment should involve controlled conditions, manipulation of variables and replication

Challenges of using scientific experiments in economics

Economics deals with dynamic human behaviour influenced by numerous variables.

Economic experiments are often uncontrolled making it hard to isolate variables.

For example, in a study of the impact of a tax cut on consumer spending, its challenging to control or manipulate all other factors that influence spending.

The use of natural experiments

Economists usually rely on natural experiments like real world events to analyse economic phenomena.

For example, the use of a new tax policy in one state can be used to study its economic effects.

The importance of empirical analysis.

Economists use statistical data and analysis to draw conclusions.

Empirical studies help identify patterns and relationships in economic data.

For example, econometric models analyse historical data to predict the impact of interest rate change on economic growth.

How is economics a social science?

Economics studies the human behaviour, decisions and interactions particularly in relation to the production, distribution and consumption of goods and services.