Revise Economic methodology for Cambridge 9708 (1.2)

Economics is a social science, which means it studies human behaviour and interactions, specifically concerning the allocation of scarce resources. Unlike natural sciences where controlled experiments are common, economists study a complex and ever-changing world where variables are interconnected. To navigate this complexity, economists employ a specific methodology. This involves making a clear distinction between objective analysis and subjective opinion, using assumptions to simplify problems, and building models to represent economic relationships. Understanding this methodology is crucial as it forms the basis of all economic theories and policies. It allows economists to construct logical arguments and test hypotheses about how individuals, firms, and governments behave in the face of scarcity.

A fundamental distinction in economic methodology is between positive and normative statements. A positive statement is an objective claim that can be tested, verified, or refuted by referring to evidence and data. It deals with 'what is, was, or will be'. For example, 'A rise in the national minimum wage by 10% will cause a 2% increase in unemployment among young workers.' This statement may be true or false, but it is testable. In contrast, a normative statement is a subjective opinion or value judgement. It expresses 'what ought to be' and often includes words like 'should', 'fair', or 'ought'. For instance, 'The government should increase the national minimum wage to ensure a fair standard of living.' This cannot be proven or disproven with data alone as it depends on personal values.

To analyse the complex economic world, economists use the assumption of ceteris paribus, a Latin phrase meaning 'all other things being equal' or 'all other things held constant'. This crucial tool allows economists to isolate the relationship between two variables of interest by assuming that all other factors that could influence the outcome remain unchanged. For example, when examining the law of demand, which states that a higher price leads to a lower quantity demanded, we assume ceteris paribus. This means we are holding constant other relevant factors such as consumer income, tastes and preferences, and the prices of substitute and complementary goods. While unrealistic in the real world, this simplification is essential for building understandable economic models and theories.

An economic model is a simplified representation of a complex economic reality, designed to provide insight into economic behaviour and outcomes. Models strip away unnecessary detail to focus on the key relationships between variables. They can take various forms, including diagrams (like the Production Possibility Curve or demand and supply diagrams), mathematical equations, or computer simulations. For example, the circular flow of income model simplifies the entire economy to show the flow of money between households and firms. The purpose of a model is not to be perfectly realistic, but to be useful for understanding, explaining, and making predictions. The validity of a model's conclusions depends heavily on the appropriateness of its underlying assumptions, including ceteris paribus.