Nature of Economics

Question 1

Behavioural economics

Answer 1

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Question 2

Ceteris paribus

Answer 2

To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus – i.e. all other influencing factors are held constant.

Question 3

Economic assumptions

Answer 3

In his 1953 essay titled “The Methodology of Positive Economics, Milton Friedman explained why economists need to make assumptions to provide useful predictions. Friedman understood economics couldn’t use the scientific method as neatly as chemistry or physics, but he still saw the scientific method as the basis. Friedman stated economists would have to rely on “uncontrolled experience rather than on controlled experiment.”

Question 4

Economic Model

Answer 4

A simplified representation of economic processes. This representation can be used to gain a better understanding of the theory.

Question 5

Microeconomics

Answer 5

Study of economics at the level of the individual firm, industry or consumer/household.

Question 6

Unintended consequences

Answer 6

Outcomes that are not the ones foreseen and intended by a purposeful action. In government intervention in markets there is usually at least one and often many unintended consequences partly because economics is a social science and we cannot predict accurately how producer and consumers will react.