Theme 1 Revision Notes:
Chapter 1: Economics as a social science
- Economics is a social science and uses scientific methods for investigation
- Economics is the study of how groups and individuals make decisions about the
allocation of scarce resources
- Positive economics deals with statements of fact that can be either refuted or
supported
- Normative economics deals with value judgements, often in the context of policy
recommendations
Economics: The Science
- In economics, it is not possible to set up experiments to deal with hypotheses
- The economist has to gather data in the ordinary everyday world where many
variables are changing over time periods
- Conclusions differ in economics as interpretations differ
- Can be argued that economics is not a science as it studies human behaviour, and it
is very hard to understand the behaviour of individuals
- In economics analysis is used via terms such as “it is likely” as there is insufficient
data to make firm predictions, as well as that variables are changing in economics all
the time therefore altering events
Theories and Models
- Theories can be expressed in words but economic models are usually presented in
mathematical terms
Purpose of Modelling: We want to know why something is as it is – we also use models and
theories in deciding how to act
Simplification
- Economic theories are often said to be unrealistic
- Simplification is used and it implies that some factors have been accounted for and
some omitted
Assumptions and Ceteris Paribus
- Ceteris Paribus is a way in which economists simplify reality – it means all other
things equal (don’t change)
- e.g: in demand theory economists consider how price affects demand – to isolate
the price they assume all other factors are unchanged (incomes/substitutes)
,Positive Economics
- The scientific or objective study of the subject – how economies and markets
function
- Positive statements are statements about economies which can be proven true or
false, they can also be supported or refuted by evidence
Normative Economics
- Concerned with value judgements – deals with the study/presentation of policy
prescriptions
- Normative statements are statements which cannot be supported or refuted
- E.g: “Manufacturing companies should invest more”
- Normative economics also contains positive economics
- E.g: “The government should increase the state pension”(normative) – this will
usually be backed with an opinion “The average state pensioner has disposable
income of 40% of the average worker”(positive) – That is a positive statement
because they can be proved or disproved and they are used to build an argument
which supports the final opinion in this case “state pensions should be raised”
- Normative statements tend to include words like “should/ought”
- Some more examples are: “Inflation should be brought down" (norm) and “inflation
should reach 5% by next year” (pos)
Key Terms
Ceteris Paribus: All things being equal; the assumption that whilst the effects of a change
in one variable are being investigated, all other variables are kept constant
Law: A theory or model which has been verified by empirical evidence
Normative Economics: The study and presentation of policy prescriptions involving value
judgements about the way in which scarce resources are allocated
Normative Statements: A statement which cannot be supported or refuted because it is a
value judgement
Positive Economics: The scientific or objective study of the allocation of resources
Positive Statement: A statement which CAN be supported or refuted by evidence
Scientific Method: A method which subjects’ theories or hypotheses to falsification by
empirical evidence
Social Science: The study of societies and human behaviour using a variety of methods
including the scientific method
, Chapter 2: Economic Data
Economic Data
- Economists collect data for two main reasons:
- The scientific method requires theories to be tested – Data can be used to support
or refute a theory
- Economists are required to provide support for particular policies – without data it is
almost impossible to make policy recommendations e.g the Chancellor every year
outlines the state of the economy and outlook for the next year – without economic
data it would be impossible to forecast the economy for the next year
- Collecting economic data is usually difficult and can be impossible
- Some macroeconomic data (national income/BoP) are collected from a variety of
sources – this can lead to inaccuracies as not all exporters/importers will show sales
and pay tax
- Other data such as the Consumer Price Index are based on surveys
- Surveys are only reliable if there is accurate sampling and measure and they are not
as accurate as a complete count
- Some macroeconomic data is very reliable statistically but do not provide a good
measure of the relevant economic variable – e.g the unemployment Count is
calculated each month, it is extremely accurate but no economist would argue that
the figure is an accurate representation of unemployment
- In microeconomics surveys are used as the common method but economists also
make use of experimental data
- The evidence gathered in microeconomics is unlikely to be able to be decisively
refuted or support a general hypothesis but can vaguely support or refute
hypothesises
Real and Nominal values
- Values unadjusted for inflation are nominal values
- These values are expressed at current prices ( the level of prices existing during the
time period being measured)
- If values/data is adjusted for inflation they are said to be real values or constant
prices
- To do this a data must be taken during one period of time, the base period – data is
then adjusted, assuming that prices were the same throughout the base period
, Indices
- It is more important to compare values rather than know absolute values
- Large numbers make it difficult to see values e.g percentage change at a glance
- Many numbers are converted into index number form – one time period is chosen as
the base period and the other statistics are compared to that value in the base
period
- The base period value is usually 100 – chosen because it is easy to work with
mathematically
Key Terms
- Base Period: The period such as a year or month with which all other values in a
series are compared
- Index Number: An indicator showing the relative value of one number to another
from a base of 100
- Nominal Values: Values unadjusted for the effects of inflation
- Real Values: Values adjusted for inflation
Chapter 3: The Economic Problem
Scarcity
- There are limited resources on the earth therefore economists state that resources
are scarce
- Scarcity means that people can only obtain a limited amount of resources at any
moment in time
- Resources which are scarce are called economic goods
- Not all resources are scarce e.g air
- Resources which are not scarce are called free goods
- However with the atmospheric pollution air could be argued to be an economic good
as factories have to purify the air to reduce pollution
Infinite Wants
- People have a limited number of needs which must be satisfied to survive
- But peoples needs are finite – but no one would choose to live at basic level if they
could enjoy a higher standard of living…
- This is because human wants are unlimited
The basic economic problem
- Resources are scarce but wants infinite which forces people to make choices and
decisions
Chapter 1: Economics as a social science
- Economics is a social science and uses scientific methods for investigation
- Economics is the study of how groups and individuals make decisions about the
allocation of scarce resources
- Positive economics deals with statements of fact that can be either refuted or
supported
- Normative economics deals with value judgements, often in the context of policy
recommendations
Economics: The Science
- In economics, it is not possible to set up experiments to deal with hypotheses
- The economist has to gather data in the ordinary everyday world where many
variables are changing over time periods
- Conclusions differ in economics as interpretations differ
- Can be argued that economics is not a science as it studies human behaviour, and it
is very hard to understand the behaviour of individuals
- In economics analysis is used via terms such as “it is likely” as there is insufficient
data to make firm predictions, as well as that variables are changing in economics all
the time therefore altering events
Theories and Models
- Theories can be expressed in words but economic models are usually presented in
mathematical terms
Purpose of Modelling: We want to know why something is as it is – we also use models and
theories in deciding how to act
Simplification
- Economic theories are often said to be unrealistic
- Simplification is used and it implies that some factors have been accounted for and
some omitted
Assumptions and Ceteris Paribus
- Ceteris Paribus is a way in which economists simplify reality – it means all other
things equal (don’t change)
- e.g: in demand theory economists consider how price affects demand – to isolate
the price they assume all other factors are unchanged (incomes/substitutes)
,Positive Economics
- The scientific or objective study of the subject – how economies and markets
function
- Positive statements are statements about economies which can be proven true or
false, they can also be supported or refuted by evidence
Normative Economics
- Concerned with value judgements – deals with the study/presentation of policy
prescriptions
- Normative statements are statements which cannot be supported or refuted
- E.g: “Manufacturing companies should invest more”
- Normative economics also contains positive economics
- E.g: “The government should increase the state pension”(normative) – this will
usually be backed with an opinion “The average state pensioner has disposable
income of 40% of the average worker”(positive) – That is a positive statement
because they can be proved or disproved and they are used to build an argument
which supports the final opinion in this case “state pensions should be raised”
- Normative statements tend to include words like “should/ought”
- Some more examples are: “Inflation should be brought down" (norm) and “inflation
should reach 5% by next year” (pos)
Key Terms
Ceteris Paribus: All things being equal; the assumption that whilst the effects of a change
in one variable are being investigated, all other variables are kept constant
Law: A theory or model which has been verified by empirical evidence
Normative Economics: The study and presentation of policy prescriptions involving value
judgements about the way in which scarce resources are allocated
Normative Statements: A statement which cannot be supported or refuted because it is a
value judgement
Positive Economics: The scientific or objective study of the allocation of resources
Positive Statement: A statement which CAN be supported or refuted by evidence
Scientific Method: A method which subjects’ theories or hypotheses to falsification by
empirical evidence
Social Science: The study of societies and human behaviour using a variety of methods
including the scientific method
, Chapter 2: Economic Data
Economic Data
- Economists collect data for two main reasons:
- The scientific method requires theories to be tested – Data can be used to support
or refute a theory
- Economists are required to provide support for particular policies – without data it is
almost impossible to make policy recommendations e.g the Chancellor every year
outlines the state of the economy and outlook for the next year – without economic
data it would be impossible to forecast the economy for the next year
- Collecting economic data is usually difficult and can be impossible
- Some macroeconomic data (national income/BoP) are collected from a variety of
sources – this can lead to inaccuracies as not all exporters/importers will show sales
and pay tax
- Other data such as the Consumer Price Index are based on surveys
- Surveys are only reliable if there is accurate sampling and measure and they are not
as accurate as a complete count
- Some macroeconomic data is very reliable statistically but do not provide a good
measure of the relevant economic variable – e.g the unemployment Count is
calculated each month, it is extremely accurate but no economist would argue that
the figure is an accurate representation of unemployment
- In microeconomics surveys are used as the common method but economists also
make use of experimental data
- The evidence gathered in microeconomics is unlikely to be able to be decisively
refuted or support a general hypothesis but can vaguely support or refute
hypothesises
Real and Nominal values
- Values unadjusted for inflation are nominal values
- These values are expressed at current prices ( the level of prices existing during the
time period being measured)
- If values/data is adjusted for inflation they are said to be real values or constant
prices
- To do this a data must be taken during one period of time, the base period – data is
then adjusted, assuming that prices were the same throughout the base period
, Indices
- It is more important to compare values rather than know absolute values
- Large numbers make it difficult to see values e.g percentage change at a glance
- Many numbers are converted into index number form – one time period is chosen as
the base period and the other statistics are compared to that value in the base
period
- The base period value is usually 100 – chosen because it is easy to work with
mathematically
Key Terms
- Base Period: The period such as a year or month with which all other values in a
series are compared
- Index Number: An indicator showing the relative value of one number to another
from a base of 100
- Nominal Values: Values unadjusted for the effects of inflation
- Real Values: Values adjusted for inflation
Chapter 3: The Economic Problem
Scarcity
- There are limited resources on the earth therefore economists state that resources
are scarce
- Scarcity means that people can only obtain a limited amount of resources at any
moment in time
- Resources which are scarce are called economic goods
- Not all resources are scarce e.g air
- Resources which are not scarce are called free goods
- However with the atmospheric pollution air could be argued to be an economic good
as factories have to purify the air to reduce pollution
Infinite Wants
- People have a limited number of needs which must be satisfied to survive
- But peoples needs are finite – but no one would choose to live at basic level if they
could enjoy a higher standard of living…
- This is because human wants are unlimited
The basic economic problem
- Resources are scarce but wants infinite which forces people to make choices and
decisions
