Edexcel A-Level Economics · Revision notes

1.1.1 Economics as a Social Science

Economics is the study of how people, firms and governments make choices when they cannot have everything they want. What makes it a social science is the object of study: people. Physics can assume an atom will behave the same way tomorrow as it did today. Economics cannot, because the subject matter answers back, changes its mind, and reacts to being studied.

This topic sits at the very start of Theme 1, and it underpins everything that follows: economic conclusions come from models, models rest on assumptions, and when an assumption fails, the conclusion built on it weakens.

Building models, and the assumptions behind them

Economists explain a complicated world by building simplified versions of it. A model deliberately strips out most of reality so that one relationship can be seen clearly. The production possibility frontier assumes an economy makes just two goods. A demand curve assumes everything except price stays still.

Models usually assume that people behave rationally: consumers choose the combination of goods that gives them the most satisfaction from a limited budget, firms choose the output that makes the most profit, and workers choose the job that gives them the best overall package. Many models also assume people have the information they need to make those choices well.

Key idea: None of these assumptions is fully true, and that is the point. A model is judged by whether it explains and predicts usefully, not by whether its assumptions are literally accurate.

A map that showed every blade of grass would be useless for finding the station.

Which assumptions a model rests on therefore shapes what it predicts. The standard competitive model of the labour market predicts that a minimum wage set above the market rate reduces employment. That prediction depends on assumptions that often fail: labour markets are rarely perfectly competitive, employers frequently have wage-setting power, and workers do not move costlessly between jobs. Behavioural economics, which you meet later in Theme 1, exists precisely because people turn out to be far less rational than the standard assumptions suggest.

Ceteris paribus

Ceteris paribus is Latin for "all other things being equal". It means isolating the effect of one variable by holding every other influence still while it changes.

Real economies never do this. When the price of petrol rises, incomes are changing, tastes are shifting, electric cars are getting cheaper and the government is adjusting fuel duty, all at once. Ceteris paribus is the mental tool that lets an economist say something useful anyway: if nothing else changed, a higher price would reduce the quantity demanded.

It also explains a distinction that runs through the whole of Theme 1.

Key distinction: A change in price causes a movement along a demand curve, because price is the variable being isolated. A change in anything else — income, tastes, the price of a substitute — causes the whole curve to shift, because one of the things being held constant has moved.

Keeping the two apart is what makes a demand and supply diagram say the right thing.

Why economists cannot run laboratory experiments

A chemist testing a reaction can run it twice, changing one thing and holding the rest constant. An economist cannot. There is only one UK economy, it cannot be rewound to 2008 to try a different policy, and it will not sit still while you test something.

Economists work around this in three main ways:

• Natural experiments. Waiting for the real world to produce something close to a controlled comparison, such as a policy introduced in Scotland but not England.
• Historical and statistical evidence. Using data from past episodes to estimate relationships, while accepting that conditions differ between periods.
• Laboratory work in behavioural economics. Small controlled studies of how people actually make decisions. This is the closest economics gets to a traditional experiment, and it is one reason behavioural economics has grown so quickly.

There are ethical limits too. No one is going to run an economy into a deep recession to see what happens to inequality.

Evaluation: The consequence is that economic evidence is rarely conclusive. Two economists can look at the same data on the same policy and reach different conclusions, because neither can isolate that policy from everything else happening at the time.

Key terms

Common mistakes

• Treating "economics isn't a real science" as the point. It isn't. The point is that economics uses systematic methods on a subject that will not hold still, which limits how firmly conclusions can be drawn.
• Treating ceteris paribus as just a phrase to define. Its purpose is practical: it is what separates a movement along a curve from a shift of it, and what explains why an estimated relationship may not hold once other things change.
• Confusing "assumptions are unrealistic" with "the model is useless". A model with unrealistic assumptions can still be the best available guide. The useful question is which assumption a conclusion depends on most, and what changes if that assumption fails.
• Writing that economists cannot test anything. They can, through natural experiments, data and behavioural studies. The limitation is control, not evidence.

How this has been examined

This topic has not appeared as a standalone question in the Edexcel papers indexed on this site. That is normal for methodology, and it is not a reason to skip it.

The ideas appear throughout the course rather than in questions of their own: whenever a conclusion is qualified with ceteris paribus, whenever a movement along a curve is distinguished from a shift, and whenever a model's assumptions are examined.

Where this goes next

The ideas here run directly into 1.1.2 Positive and normative economic statements, which separates what economics can settle with evidence from what depends on values. They reappear in 1.2.2 Demand and 1.2.4 Supply, where ceteris paribus does the work of separating movements from shifts, and again in 1.2.10 Alternative views of consumer behaviour, where the rationality assumption is challenged head-on.