AQA A-Level Economics

What economists study and how

Economics is a social science: it studies how people, firms and governments make choices when resources are limited, and what the results are for society. Like the natural sciences it builds models, tests them against evidence and revises them when they fail. Unlike them it studies human behaviour, which cannot be put in a laboratory, is influenced by expectations and by what others are doing, and does not always follow a predictable pattern. So economists rarely get the clean, repeatable experiments a physicist does, and they rely on observed data, natural experiments (where a policy change affects one group and not a comparable one) and, increasingly, controlled trials.

Models and ceteris paribus

An economic model is a simplified picture of part of the economy. It leaves out detail on purpose so that the main relationships can be seen, in the way a map leaves out most of the ground it covers. Models rest on assumptions, for example that consumers are rational or that firms in a market sell identical products, and a model is only as useful as those assumptions are realistic enough for the question being asked.

Because many things change at once in a real economy, models use the assumption of ceteris paribus, Latin for "all other things being equal". To see the effect of a change in price on the quantity demanded, everything else that affects demand (incomes, tastes, the prices of related goods) is held constant. This makes cause and effect clear, but it is also a weakness, because in practice other factors rarely stay still, so a prediction made under ceteris paribus can be wrong even when the model is sound.

Similarities to and differences from other sciences

The methods share a good deal. Economists state hypotheses, collect data, use statistics to test relationships and accept that a theory can be overturned. The differences come from the subject matter:

• people respond to a prediction about themselves, so forecasts can change the behaviour they predict;
• controlled experiments are hard, expensive or unethical at the scale of a whole economy;
• there is often no single agreed answer, because the evidence is open to more than one reading and because some questions depend on values;
• relationships are not fixed over time, since institutions, technology and attitudes change.

Economists therefore often disagree, even when they are working from the same data, and the disagreements are usually about how large an effect is, how long it takes, or how much weight to give one objective over another.

Positive and normative statements

A positive statement is about what is, was or will be, and can in principle be tested against evidence, whether or not it turns out to be true. "A rise in the rate of income tax reduced the number of hours worked in the UK" is positive: data could support or contradict it.

A normative statement is a judgement about what ought to be, and depends on values. "The government ought to raise the rate of income tax to pay for more hospitals" is normative. Evidence can inform it, but evidence cannot settle it, since it involves opinions about fairness, the proper size of the state and how to weigh one group's gains against another's losses.

A statement that is false can still be positive, because what makes it positive is that it could be checked. Statements also often mix the two, and a useful habit is to separate the factual claim from the value judgement attached to it.

Value judgements and policy

Value judgements affect which problems economists choose to study, which objectives a government pursues and how it weighs them. Two people can accept the same positive analysis and still disagree about policy. One might accept that a higher minimum wage raises the pay of low-paid workers and may reduce some jobs, and support it because reducing poverty matters more to them; another may oppose it because they put more weight on the jobs that might be lost.

People's views on the best option are shaped by the positive consequences of each choice (who gains, who loses, by how much) and also by moral and political beliefs, such as how much inequality is acceptable or how far individuals should be left to decide for themselves. This is why economics cannot produce a single correct policy, and why a well-argued answer to a policy question sets out the likely effects and then states which value judgements lead to which conclusion.