Key Definitions
- Economics (Social Science): The study of how individuals, firms and governments allocate scarce resources to satisfy unlimited wants
- Positive Statement: A statement based on objective facts that can be tested or proven true/false
- Normative Statement: A statement based on value judgements, opinions or beliefs
- Ceteris Paribus: A Latin term meaning “other things being equal”
- Short Run: Time period where at least one factor of production is fixed
- Long Run: Time period where all factors of production are variable
- Very Long Run: Time period where all factors, including technology and preferences, can change
Economics as a Social Science
Economics is classified as a social science because it studies human behaviour in relation to resource allocation.
Unlike natural sciences, economic outcomes are influenced by human decisions, which can be unpredictable and influenced by psychological, cultural and social factors.
Analysis
- Economic models are used to simplify reality and predict behaviour
- However, individuals do not always act rationally, which can limit the accuracy of predictions
- Therefore, economic conclusions are often probabilistic rather than certain
Positive and Normative Statements
Positive Statements (Objective)
These are factual statements that can be tested with evidence.
Examples:
- “An increase in price reduces quantity demanded”
- “Unemployment increased by 2% last year”
Normative Statements (Subjective)
These involve value judgements and cannot be proven true or false.
Examples:
- “The government should reduce inequality”
- “Taxes are too high”
Key Distinction
- Positive = fact-based → testable → used in analysis
- Normative = opinion-based → not testable → used in evaluation
Analytical Importance
- Economic analysis (AO2) must rely on positive reasoning
- Evaluation (AO3) often includes normative judgement (e.g. fairness, desirability of outcomes)
Ceteris Paribus
Ceteris paribus means that when analysing the relationship between two variables, all other influencing factors are assumed to remain constant.
Example
When analysing demand:
- If price increases, quantity demanded falls ceteris paribus
- This assumes income, tastes and prices of substitutes remain unchanged
Analytical Importance
- Allows economists to isolate cause-and-effect relationships
- Makes complex real-world situations easier to analyse
Limitation (AO3)
- In reality, multiple variables change simultaneously
- Therefore, conclusions based on ceteris paribus may not always hold in practice
Importance of Time Period
Short Run
- At least one factor of production is fixed (e.g. capital)
- Firms cannot fully adjust to changes
Example: A firm cannot immediately expand factory size
Long Run
- All factors of production are variable
- Firms can adjust fully to changes
Example: Firms can invest in new machinery or enter/exit markets
Very Long Run
- Includes changes in technology, institutions and consumer preferences
- Economic structures may evolve significantly
Analytical Importance
- Elasticities differ over time (e.g. demand is more elastic in the long run)
- Costs and production decisions change depending on the time frame
- Policy impacts vary depending on whether short-run or long-run effects are considered
Developed Analysis
- Economic models rely on ceteris paribus to isolate relationships. However, if other variables change, predictions may become inaccurate
- Firms may not respond immediately to price changes in the short run due to fixed factors, but can adjust fully in the long run, affecting supply decisions
- Normative judgements influence government policy decisions, even when positive data suggests alternative outcomes
Evaluation
Reliability of Economic Models
Economic models simplify reality and may ignore important variables, reducing accuracy
Role of Human Behaviour
Individuals do not always act rationally, limiting the predictive power of economic theory
Changing Conditions
Ceteris paribus rarely holds in real-world situations, as multiple variables change simultaneously
Time Perspective
Short-run conclusions may differ significantly from long-run outcomes, making it essential to specify the time frame
Normative Bias
Policy decisions are often influenced by subjective values, meaning different economists may interpret the same data differently
Common Mistakes
- Confusing positive statements with normative opinions
- Using normative language in analysis instead of evaluation
- Ignoring the ceteris paribus assumption in explanations
- Failing to specify time period in analysis
- Writing overly theoretical answers without application
Exam Tips
- Clearly distinguish between positive (analysis) and normative (evaluation) statements
- Use ceteris paribus explicitly when explaining relationships
- Always specify whether analysis is short run or long run where relevant
- Support analysis with logical chains (cause → effect → impact)
- Use evaluation to question assumptions and highlight limitations