1.2 Economic methodology

Economics is a social science that studies how people and organisations make choices under scarcity and how those choices affect resource allocation and welfare.

It uses models, data and empirical evidence to explain behaviour, but human decisions are influenced by institutions, expectations, culture and policy, so predictions are conditional rather than laws of nature.

A model of how a tax changes demand can be tested against observed data, then revised if consumers respond differently from the assumptions.

Calling economics a social science does not make it opinion-only; it uses evidence, while recognising that behaviour and context matter.

A positive statement can be tested against evidence about what is or was. A normative statement says what ought to be and depends partly on values or priorities.

Policy arguments often combine both: a factual prediction may be positive, while the decision about whether the outcome is desirable is normative.

“A higher carbon tax reduces fuel demand” is testable; “the government should raise the carbon tax” adds a value judgement about climate benefits and distribution.

A statement is not normative merely because it concerns policy, and a positive claim can still be uncertain or disputed.

Ceteris paribus means “other things being equal”: analyse the effect of one change while treating other relevant variables as unchanged.

It isolates a relationship in a model, such as how a price change affects quantity demanded. In the real world, several factors may change at once, so the condition must be stated when applying the result.

“A rise in price reduces quantity demanded, ceteris paribus” holds income, tastes, prices of related goods and expectations constant.

Ceteris paribus does not claim other variables never change; it identifies the controlled comparison used to reason about one effect.

The short run is a period when at least one factor is fixed; in the long run all factors can be varied; the very long run also allows technology, institutions and population to change.

These are economic descriptions, not universal clock times. The relevant period depends on the decision and how fast inputs or capacity can adjust.

A restaurant may add staff in the short run but need the long run to expand its kitchen; over the very long run, cooking technology and consumer habits may change too.

Long run does not simply mean “a year” and does not guarantee that every adjustment is costless.