Economics (9708) | Economic methodology

AS Level Economics (9708): Economic Methodology (1.2)

Welcome to one of the most fundamental chapters in Economics! Don't worry, this isn't about complicated diagrams or difficult maths. This chapter is about learning how economists think and the special language they use. Understanding methodology is crucial because it helps you build strong, logical arguments and spot weak claims in the news!

Let's dive into the four core pillars of economic methodology.

1.2.1 Economics as a Social Science

You might think of science as test tubes and laboratories. But science simply means a systematic study of phenomena. Economists study human behavior, which makes Economics a social science.

What does 'Social Science' mean?

A natural science (like Physics or Chemistry) studies the physical world. These subjects are governed by fixed laws (e.g., gravity). If you drop a ball, it always falls down.

A social science studies human beings and society (e.g., Economics, Psychology, Sociology). The key difference is that human behavior is:

• Unpredictable: People don't always act rationally.
• Complex: Many factors influence a single decision (e.g., buying a new phone depends on price, income, peer pressure, and mood!).

Because economists cannot perform highly controlled experiments on millions of people or entire nations (imagine trying to test a tax increase by applying it only to people named ‘Alex’!), economic models and theories are constantly being tested against real-world data and adjusted.

Key Takeaway: Economics aims to be scientific, but its findings are less certain than natural sciences because it deals with the complicated and often irrational element of human choice.

1.2.2 Positive and Normative Statements

This is a favorite topic for examiners! You must know the clear difference between statements based on facts and statements based on opinions.

a) Positive Statements

Positive statements are objective and factual claims about the world. They describe what *is*, what *was*, or what *will be*.

• They can be tested, proven, or disproven using data.
• They do not need to be true, but they must be testable.

Example: "An increase in the minimum wage will lead to a rise in unemployment." This is a positive statement because we can check the employment figures after a wage increase to see if it is correct or incorrect.

Memory Aid: Positive = Provable or Potentially false, but always Testable.

b) Normative Statements

Normative statements are subjective claims that include a value judgement. They describe what *ought to be* or what *should* happen.

• They cannot be proven true or false because they are based on beliefs or opinions.
• Look for key words like "ought," "should," "fair," "better," or "unjust."

Example: "The government should increase the minimum wage to ensure workers earn a fair living." This is a normative statement because "fair" is an opinion (a value judgement).

Why is the distinction important?
Economists generally prefer to work with positive statements when building models, but when policy decisions are made (like setting interest rates or taxes), normative statements (politics and morals) often influence the final outcome.

Quick Review: Positive vs. Normative

Positive (Fact)	Normative (Opinion)
What is?	What ought to be?
Testable? Yes	Testable? No (based on ethics/morals)
Objective? Yes	Objective? No

1.2.3 The Meaning of Ceteris Paribus

This is a Latin phrase that translates to: "all other things being equal."

Why do economists use it?

As we learned, the real economy is complex. When economists want to study the relationship between just two things—for example, the price of coffee and the amount people buy—they have to assume that everything else that affects coffee demand (like incomes, the price of tea, or the weather) remains constant.

Without the assumption of ceteris paribus, economic laws and models would be impossible to develop.

Analogy: Imagine testing the effect of a new fertilizer (Variable A) on plant growth. If you also change the amount of sunlight (Variable B) and the water (Variable C), you won't know whether the growth came from the fertilizer or the other changes. To isolate the effect of the fertilizer, you must keep B and C constant. That's ceteris paribus in action!

A classic application:
The Law of Demand states that when the price of a good falls, the quantity demanded rises, ceteris paribus.

• If the price of apples falls, people buy more apples.
• BUT, if the price of apples falls and the government suddenly increases taxes so everyone has less disposable income, demand might not rise. The assumption was violated!

Key Takeaway: Ceteris Paribus is the simplifying assumption that allows economists to study isolated cause-and-effect relationships in a complex world.

1.2.4 Importance of the Time Period

In economics, time is not just minutes and hours; it determines how flexible resources are, particularly for firms and producers. We divide the time horizon into three main periods:

a) Short Run (SR)

The short run is a period where at least one factor of production is fixed. The firm cannot change the quantity of that factor.

• Example: A bakery wants to increase output quickly. It can hire more staff (Labour) and buy more ingredients (Raw Materials). However, it cannot build a new, larger factory (Capital) instantly. The factory (Capital) is the fixed factor.

b) Long Run (LR)

The long run is a period where all factors of production are variable. The firm has enough time to change the quantity of any resource it uses.

• Example: The bakery has time to plan, raise money, buy land, and build a new, larger factory. In the long run, the firm can change its entire scale of production.

c) Very Long Run (VLR)

The very long run is a period where not only are all factors variable, but the fundamental state of technology, knowledge, and resource availability itself can change.

• Example: The invention of 3D printing completely changes how manufacturing happens, or a country discovers massive new oil reserves. These are changes that redefine the economic landscape.

Did you know?
The short run and long run are not defined by specific lengths of time (like 6 months or 5 years). They are defined purely by the ability of firms to vary their factors of production. For a street food vendor, the long run might be a few hours; for an airline building a new terminal, the long run might be a decade.

Key Takeaway: The time period dictates the flexibility of resources. This is essential for understanding how costs change (short run vs. long run costs) and how quick markets can react to changes.