Learning Objectives
Students will understand:
- What it means to think like an economist: the process of developing models in economics, including the need to make assumptions.
- How the ‘ceteris paribus’ assumption is used in building models.
- The difficulties faced in economics when making scientific experiments.
Content
What is Economics?
Economics: The study of how groups of individuals make decisions about the allocation of scarce resources, it is a social science.
Social science: The study of societies and human behaviour using a variety of methods including the scientific method.
The Scientific Method: A method of acquiring knowledge through proposing and testing ideas The method involves generating abstract models to help explain how a complex, real world operates.
3 steps:
- Postulate a theory or model (put forward a hypothesis, capable of refutation).
- Gather evidence to support or refute the theory.
- Accept, modify or refute the theory.
Models: Economists use models to simplify reality to improve our understanding of the world.
Assumptions
The Role of Assumptions: Make the world easier to understand.
Assumptions allow Economists to make models to answer different questions.
Ceteris Paribus: Latin phrase meaning ‘all other things remaining equal’.
An important assumption in economics because in the real world it is usually hard to isolate all the different variables.
Pros and Cons of using Models
Pros:
Models forecast activities and help future analysis/policy.
They give a clear and mathematical representation of the data and help to broaden our understanding
Models simplify otherwise complex data.
Answers become accessible.
Models quicken the pace of analysis.
They allow economists to isolate the effect of a specific variable and examine causality (this helps them consider which factors are relevant and irrelevant).
Cons:
The bias of the creator of the model can act to bias the results.
Assumptions may not be valid in different settings.
Models assume complete rationality. however, individuals have bounded rationality in reality.
Humans may not act in different ways despite the predictions of the model.
A model’s output quality is determined by its input quality.
Data and analysis may be overly simplified leading to incorrect results.
Linked Post
See workbook for learning tasks.
Difficulties in conducting scientific experiments in Economics
Lack of a sterile environment
Economists can’t pause the economy to examine a specific element and hold all other areas constant.
Economic experiments can be distorted by changes to other variables.
Hard to establish a control group as very few economic agents are the same, e.g. not all cities or countries are comparable.
It is hard to establish the impact of specific economic change.
Economic agents have free will and imagination and so can react to the work of economists and change their behaviour.
This creates new behaviours which then diminishes the accuracy of results.
Ethical objections
Even if economists could create a sterile economic environment, there are ethical problems in subjecting people’s lives to the whims of economists.
Should economists be allowed to gamble with other people’s jobs, homes, and possessions for the sake of economic curiosity?
No universal laws of human behaviour exist
Some believe that due to the diversity of human beings and the diverse conditions people face there are no universal rules or laws of behaviour to discover.
Economists cannot predict and create laws of how every human allocates their resources.
Presentation
Workbook
N.B. There is one workbook for the Economics as a ‘Social Science’ and ‘Positive & Normative Statements’ topics.
