Section 1.3.1Unit 1: Markets in Action

Introductory Concepts

1

The Nature of Economics

Economics as a Social Science
  • Economics is a social science that studies how societies allocate scarce resources among competing unlimited wants.
  • As a social science, economics studies human behaviour and decision-making, unlike natural sciences that study the physical world.
  • Economists build models (simplified representations of reality) to explain and predict economic behaviour.
  • Models rely on assumptions to reduce complexity — e.g. assuming rational behaviour or perfect information.
  • The ceteris paribus assumption (Latin: 'all other things being equal') is used to isolate the effect of one variable by holding all others constant.
  • Economic models are tested against real-world data; if evidence contradicts predictions, the model is revised or rejected.
  • Economics is divided into microeconomics (individual markets, firms, consumers) and macroeconomics (the whole economy — GDP, inflation, unemployment).
Exam Tip
When a question asks about economics as a social science, emphasise that it studies human behaviour (not physical phenomena) and relies on models, assumptions and ceteris paribus.
Positive and Normative Economics
  • Positive statements are objective statements that can be tested against evidence — they describe 'what is'.
  • Example: 'A rise in income tax will reduce consumer spending' — this can be tested with data.
  • Normative statements are subjective statements based on value judgements — they express 'what ought to be'.
  • Example: 'The government should raise the minimum wage' — this depends on opinions and values.
  • Normative statements often contain words like should, ought to, better, fairer.
  • Value judgements are opinions influenced by personal beliefs, political views and ethical positions; they cannot be proven right or wrong.
  • Government policy decisions inevitably involve normative judgements — e.g. choosing between efficiency and equity.
Exam Tip
Examiners frequently test your ability to distinguish positive from normative. Look for opinion-laden language ('should', 'ought', 'fair') as a giveaway for normative statements.
2

Scarcity, Choice and Opportunity Cost

3

The Production Possibility Frontier (PPF)

4

Specialisation and the Functions of Money

5

Types of Economic Systems