Economics as a social science

Economics examines how people make choices about using limited resources to meet their needs and wants. This makes economics a social science, as it studies interactions between individuals, firms, and governments in society.

Similarities and differences between economic methodology and natural sciences

Economists use methods that mirror those in natural sciences, like chemistry, to understand economic issues. However, there are key differences due to the nature of economic studies.

Similarities in methodology

Economists follow a scientific approach to build and refine their understanding:

• Developing theories and models - Economists create theories and economic models to explain real-world phenomena.
• Using simplifying assumptions - These limit the number of variables considered.
• Testing theories - Theories are checked against real-world facts using tools like observation, deduction, graphs, and statistics.
• Incorporating empirical data - Data from observations or records is used to improve and update economic models.
• Making predictions - Refined models help forecast future economic events.

Differences from natural sciences

Unlike natural sciences, economics cannot rely on controlled laboratory experiments:

• Lack of controlled environments - Economists study real-world scenarios where many factors change at once. For example, when analysing how advertising influences smartphone sales, it is impossible to keep variables like consumer tastes fixed.
• Reliance on real-world data - Instead of experiments, economists use historical data and observations.

The role of ceteris paribus in economic analysis

Ceteris paribus is a key assumption in economics that helps isolate the effects of specific variables. It is Latin for 'all other things remaining equal'.

How ceteris paribus is applied

• Isolating relationships - It allows economists to focus on the link between two factors, such as price and quantity demanded, by assuming other influences stay constant.
• Developing theories and models - This assumption simplifies analysis, enabling the creation of theories and models that explain economic behaviour.
• Making predictions - By holding other variables steady, economists can predict outcomes more reliably.

Factors influencing economic decisions

Economic choices made by individuals, firms, or governments are shaped by a mix of opinions, ethics, politics, and immediate outcomes.

Key influences on decisions

• Normative statements - These are based on personal opinions about what should happen.
• Moral views and value judgements - Decisions often reflect beliefs about fairness, like ensuring everyone has access to education.
• Political judgements - Choices may aim to gain support, for example, by increasing spending on public healthcare.
• Short-term positive consequences - Some decisions prioritise quick benefits, such as lowering interest rates to boost growth, even if it risks long-term issues like inflation.

Positive and normative statements in economics

Economic statements fall into two categories: positive and normative.

Positive statements

Positive statements are objective and can be tested using evidence:

• Characteristics - They describe facts or relationships that can be verified as true or false with data.
• Example - "An increase in fuel prices will reduce the number of people taking leisure trips by car."
• Importance - They help test economic theories and models to see if they align with reality.

Normative statements

Normative statements are subjective and include value judgements:

• Characteristics - They express opinions about what ought to be and cannot be proven right or wrong.
• Example - "Public transportation should be subsidised more heavily than private vehicle ownership."
• Importance - They shape decision-making and government policies, such as introducing progressive taxation to redistribute income.