1.1.1 Economics as a Social Science

Question 1

Define economics

Answer 1

the study of how societies allocate scarce resources to meet unlimited wants

Question 2

What is the role of assumptions in economics?

Answer 2

• Assumptions are simplifications made in economic models to focus on key variables.
• Assumptions help isolate the relationship between variables and make analysis manageable. In the production possibilities frontier (PPF) model, we assume constant technology to understand trade-offs between two goods.

Question 3

What are the advantages and disadvantages of economic models?

Answer 3

Advantages:
- Models provide a framework for understanding economic phenomena. They allow economists to make predictions, test theories, and guide policy.

Limitations:
- Models are simplifications of reality and may not capture all complexities.
- Assumptions can be unrealistic, leading to inaccurate predictions.
Example: Assumption of rational behaviour may not apply to all individuals.

Question 4

Define ceteris paribus and its applications

Answer 4

Ceteris paribus means “all else being equal” in Latin. It’s an assumption that allows economists to isolate the effect of one variable while holding others constant.

Application in Demand and Supply Analysis

In the demand and supply model, ceteris paribus is used to focus on the impact of price changes while keeping other factors constant.
Example: If we want to study the effect of an increase in the price of smartphones on the quantity demanded, we hold income and consumer preferences constant.

Question 5

What are the benefits and critiques of ceteris paribus.

Answer 5

Adv: Ceteris paribus simplifies complex economic relationships and makes them more understandable. It helps identify cause-and-effect relationships between variables.

Disadvantages: Critics argue that in the real world, it’s challenging to hold all variables constant. Changes in one variable often lead to changes in others, making isolation difficult.

Question 6

Can economics make scientific experiments? Why?

Answer 6

Characteristics of Scientific Experiments

Scientific experiments involve controlled conditions, manipulation of variables, and replication.
In physics and chemistry, controlled experiments are feasible.
2. Challenges in Economics

Economics deals with complex, dynamic human behavior influenced by numerous variables.
Economic experiments are often uncontrolled, making it difficult to isolate variables.
Example: In a study of the impact of a tax cut on consumer spending, it’s challenging to control all other factors influencing spending.
3. Use of Natural Experiments

Economists often rely on natural experiments (real-world events) to analyze economic phenomena.
Example: The introduction of a new tax policy in one state can be used to study its economic effects.
4. Importance of Empirical Analysis

Economists use statistical analysis and data to draw conclusions.
Empirical studies help identify patterns and relationships in economic data.
Example: Econometric models analyse historical data to predict the impact of interest rate changes on economic growth.