1.1.1 Economics as a social science

Question 1

What are models used for and what are they built on?

Answer 1

Economists develop models and theories to help explain the multiple choices we make in our daily lives. These
models are built on assumptions that can help to simplify analysis and allow us to think about links between
one variable and another. However, many of the assumptions that economists make risk being criticised for
not being sufficiently realistic – the real world is far more complex than most economic models suggest.

Question 2

What are assumptions?

Answer 2

• Assumptions are initial or prior conditions made before a micro or macroeconomic analysis is built.
• Sometimes assumptions are used for simplification of a theoretical idea or an economic relationship

Question 3

Explain what ceteris paribus is.

Answer 3

To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus –
i.e. all other influencing factors are held constant. For example, “an increase in real income will cause an
increase in demand, ceteris paribus.” Here we keep constant all other factors that might lead to a change in
demand for a product.

Question 4

What are the neo classical assumptions?

Answer 4

• people are rational;
• people (e.g. workers, business owners etc) aim to maximise their “utility” i.e. their ‘satisfaction’. For
  businesses, this means aiming to maximise their profit;
• people act independently of each other when making their decisions;
• the information needed to make decisions is always accurate and complete.