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Economic methodology text

notes of economics

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7 views

Economic methodology text

notes of economics

Uploaded by

vasur18
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Economic Methodology

Points to Ponder Upon:


Economists have developed their own language of terms and concepts that they use to
explain and evaluate the issues that affect our world and everyday lives. In this book,
you will learn the terminology used by economists. Some words may seem familiar, for
example demand. market. unemployment, 'inflation' and so on. Other terms will be new
to you. By the end of your AS Level studies, you should be able to use these words and
terms in a useful way to enable you to think like
an economist.
The words in colour in the headlines are in general everyday use. The words have very
specific meanings when used in economics, as you will see as you study this book.
Discuss in a pair or a group:
- Look at two or three recent newspapers. Identify any key economic terms you can find
- Select one article. Summarise the main points. State why these points may be of
interest to economists.
Think back to Section 1.1 and your understanding of the fundamental economic
problem. You can use your understanding of writing a simple definition of economics, for
example the study of how to allocate scarce resources in the most efficient way.
The study of economics is divided into two parts: microeconomics and
macroeconomics.
Economics
Microeconomics is the study of individual markets. It looks at the behaviour and
decisions of households (consumers) and firms (businesses), and how they interact. An
example of a microeconomics topic is the factors that explain why consumers buy some
goods and not others.
Macroeconomics is the study of the whole economy or group of economies.
Macroeconomics also looks at how consumers and firms interact but on a broader level.
Macroeconomics is likely to include some form of government involvement.
For example, macroeconomics covers the reasons why one economy grows at a faster
rate than another economy.

2.2 Economics as a social science


Economies is a social science. The social aspect is because economics is alst human
bacharia. particulary in elaion to satistying human needs and wants, signe he ries in a
science: tha i because of the way that economists put forward and investigate shektes i
the same way s scientists, Like scientists, economists put forward new ideas that seek
to explain the ever and rapidly changing global economy, in which we all work and live.
Define problem to be investigated
Put forward a theory
Investigate the theory
Accept or reject the theory
The theories put forward by economists are often referred to as models. Models are a
simplifed representation of what has actually taken place and are usually explained
mathematically. The value of models is that they can be used over and over again to
test a theory in many different contexts
2.3 Positive and normative statements
Economists may analyse facts without making any value judgements. For example, an
economist might make these statements:
- A fall in supply of petrol leads to an increase in its price.
- A 10% increase in tourist numbers in Mauritius has created 10% more employment.
- An increase in taxation on cars results in fewer cars being sold.
- The inflation rate in 2021 is 8%.
All of the above statements refer to what will happen, based on actual evidence or
observation. The economist does not give their opinion or make a value judgement.
Statements like these are known as positive statements.
When an economist expresses an opinion or makes a value judgement within their
analysis, the statement can no longer be proven. Statements that express a value
judgement are referred to as normative statements. For example, each of the normative
statements below contains a value judgement within the analysis:
- A fall in the supply of petrol should lead to an increase in its price.
- A 10% increase in tourist numbers in Mauritius is likely to create at least 15% more
jobs in the tourist industry.
- An increase in taxation on cars might result in a fall in demand for new cars.
- The inflation rate of 8% in 2021 was the worst in 10 years.
Activity
Convert each of the normative statements below into positive statements:
- The price of onions should increase due to prolonged drought.
- An increase in government spending on the railways is the best way to increase

employment in India.
It is wrong to always assume a more equal distribution of income in a planned economy
compared to a market economy.
2.3 Meaning of the term ceteris paribus
Ceteris paribus is a Latin term widely used by economists to refer to a situation where
other things remain equal' or are unchanged. Ceteris paribus allows economists to
simplify a situation by assuming that apart from a single change of circumstances,
everything else is unchanged. In this way, economists can model the effects of one
change at a time.
For example, when analysing the reasons why consumers purchase a product, there
may be many reasons. The most important reason is usually price. In analysing the
effect of a change in price, it is understood that all other factors that determine
consumer demand are ceteris paribus. In other words, they are not subject to change.
The margin
Like ceteris paribus, 'the margin' is another tool economists use to simplify a situation.
Many aspects of microeconomics involve analysing decisions 'at the margin: By this,
economists mean that a small change in one variable, such as consumer income, will
lead to further (small) changes in other variables, such as consumer spending and
imports. Using the margin to analyse issues enables economists to predict what the
likely impact of change might be.
The margin and decision-making: Decision-making by consumers, firms and
governments is based on choices at the margin. For example, firms will produce up to
the point where the revenue generated by an extra unit of output is equal to the cost of
producing it. This concept - like scarcity and choice - can be applied in many different
situations that economists study.
2.2 The importance of time periods
Economists take change into account in their analysis of situations. They use time
periods to assess how, over time, change can influence the concepts that economists
seek to model and explain. For example, the following time periods are often used when
economists discuss the factors of production
- The short run is a time period in which it is possible to change only some inputs.
Typically, it is when labour, a variable resource or factor of production, can be increased
or decreased to change what is produced. So, with all other factors of production such
as capital resources remaining the same (ceteris paribus), a firm taking on more
workers may be able to increase the quantity of goods it produces.
- In the long run, it is possible for all factors of production or resources to change. So, in
the long run, a firm may improve the quality and quantity of its capital by building a new
factory to increase its output. This will usually allow the firm to be more efficient since it
has had time to assess the best way to achieve its objectives.
- The very long run is where not only are all factors of production variable but all other
key inputs are variable. Key inputs can include technology, government regulations and
social concerns. The key concept Time' may be used to show where the distinction
between the short run and the long run is an important consideration.

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