1.1.1 Economics as a Social Science (Edexcel)

This study note covers 1.1.1 Economics as a Social Science for the Edexcel specification.

A) Thinking Like an Economist: Developing Models in Economics

1. Introduction to Economic Models

• Economics is the study of how societies allocate scarce resources to meet unlimited wants.
• Economists use models to simplify and analyze complex economic situations.

2. The Role of Assumptions

• Assumptions are simplifications made in economic models to focus on key variables.
• Assumptions help isolate the relationship between variables and make analysis manageable.
• Example: In the production possibilities frontier (PPF) model, we assume constant technology to understand trade-offs between two goods.

3. Advantages of Economic Models

• Models provide a framework for understanding economic phenomena.
• They allow economists to make predictions, test theories, and guide policy.
• Example: The supply and demand model helps analyze price changes and market equilibrium.

4. Limitations of Economic Models

• Models are simplifications of reality and may not capture all complexities.
• Assumptions can be unrealistic, leading to inaccurate predictions.
• Example: Assumption of rational behaviour may not apply to all individuals.

B) The Use of the Ceteris Paribus Assumption in Building Models

1. Definition of Ceteris Paribus

• Ceteris paribus means "all else being equal" in Latin.
• It's an assumption that allows economists to isolate the effect of one variable while holding others constant.

2. Application in Demand and Supply Analysis

• In the demand and supply model, ceteris paribus is used to focus on the impact of price changes while keeping other factors constant.
• Example: If we want to study the effect of an increase in the price of smartphones on the quantity demanded, we hold income and consumer preferences constant.

3. Importance in Economic Analysis

• Ceteris paribus simplifies complex economic relationships and makes them more understandable.
• It helps identify cause-and-effect relationships between variables.
• Example: When analyzing the impact of a minimum wage increase, ceteris paribus helps isolate the effect on employment while assuming other factors remain constant.

4. Critique of Ceteris Paribus Assumption

• Critics argue that in the real world, it's challenging to hold all variables constant.
• Changes in one variable often lead to changes in others, making isolation difficult.
• Example: Inflation may affect both the price level and consumer preferences simultaneously, challenging the ceteris paribus assumption.

C) The Inability in Economics to Make Scientific Experiments

1. Characteristics of Scientific Experiments

• Scientific experiments involve controlled conditions, manipulation of variables, and replication.
• In physics and chemistry, controlled experiments are feasible.

2. Challenges in Economics

• Economics deals with complex, dynamic human behavior influenced by numerous variables.
• Economic experiments are often uncontrolled, making it difficult to isolate variables.
• Example: In a study of the impact of a tax cut on consumer spending, it's challenging to control all other factors influencing spending.

3. Use of Natural Experiments

• Economists often rely on natural experiments (real-world events) to analyze economic phenomena.
• Example: The introduction of a new tax policy in one state can be used to study its economic effects.

4. Importance of Empirical Analysis

• Economists use statistical analysis and data to draw conclusions.
• Empirical studies help identify patterns and relationships in economic data.
• Example: Econometric models analyse historical data to predict the impact of interest rate changes on economic growth.