Key Idea: Economists cannot run a country twice to see what happens. So they work like this: guess, simplify, test, and admit it when the guess was wrong. This topic is about that method: what a model is, what it leaves out, and how the big names have argued about it for 250 years. Where you meet it:
Paper 1
- Essays.
- A strong answer names the assumption a model rests on and says what changes if it fails.
Paper 2
- Data response.
- Define the circular economy, and explain how it cuts market failure. Both have been asked, inside the Unit 4 sustainability question.
Every diagram
- Ceteris paribus.
- Shift one curve at a time, and say so: assuming nothing else changes.
🔬 How economists work
The method has four steps. Every model in this course was built this way.
From a guess to a theory
- Hypothesis — A guess you can test. Raise the price of energy drinks and students buy fewer.
- Model — The guess stripped down to one relationship, so you can see it. A map drops every tree so you can see the route.
- Evidence — Go and look at what sales actually did.
- Refutation — If sales went up, the guess was wrong. Say so. A guess that survives test after test becomes a theory.
Guess → Simplify → Check → Admit it
Trainer prices rise, a rival launches, and it is the end of term. Sales fall. Which one did it? You cannot say. Hold the other two still and you can. That is why every diagram shifts one curve at a time.
⚖️ Positive or normative?
Before you answer any claim, ask one question: could evidence settle it?
Positive: go and check: *Unemployment fell to 4%.* Go and look.. *A tariff on trainers raises their price.*. Positive does not mean true. *The moon is made of cheese* is positive: checkable, and false.. People disagreeing about the answer does not make it normative..
Normative: depends what you value: *Unemployment is still too high.* No amount of looking settles it.. *The minimum wage ought to go up.*. Watch for **should**, **ought**, **too high**, **fairer**.. It rests on what you think matters: a **value judgment**..
Equality: everyone gets the same. A flat £1,000 tax on every adult. Equity: everyone gets what is fair. A tax that takes more from higher earners. Which is better is a value judgment. Most policy rows are a normative disagreement dressed up as a positive one.
🧱 Where models crack
Every model rests on something that is not quite true. That is how it gets simple enough to read. You just need to know which untrue thing yours stands on.
| The model assumes | Where it cracks |
|---|---|
| People are rational | think of your last unplanned purchase |
| Everything else stays still | in real life three things move at once; ceteris paribus is an exam convenience |
| Everyone has full information | buyers do not know every price |
| The data is right | it arrives late and gets revised |
Important: This model is unrealistic on its own says nothing. Name the assumption, then say what changes if it fails: the model predicts prices fall, but that assumes buyers notice the cut. If they do not, demand may not move.
📜 250 years of argument
Each big name was answering a problem of their own time. Tie the name to the problem, not to the date.
Smith, 1776
- The baker wants your money, not your thanks. Self-interest plus specialising produces what people want, as if led by an invisible hand. So: laissez faire, leave it alone.
The margin, 1800s
- Water is nearly free, a diamond is not. What something is worth is what ONE MORE is worth. Marginal means the next one, for the rest of the course.
Say and Marx
- Say: producing pays incomes, incomes buy the output, so a slump fixes itself. Marx: workers make more than they are paid, the gap goes to whoever owns the machines, so crises keep coming.
Keynes, 1930s
- Wages fell, prices fell, the jobs did not come back. An economy can sit stuck with too little spending. If nobody else will spend, the government should.
Friedman, 1970s
- Inflation and unemployment high at the same time. The danger is too much money: control it, then stand back.
Now
- Both levers get pulled. Behavioural economics watches what people actually do. The circular economy designs things to come back.
Keynes: Too little spending is the problem.. Cutting wages makes it worse: **workers are also customers**.. Government spending can fix it..
Friedman and the monetarists: Too much money is the problem.. Control the money supply, then stand back.. People see policy coming and it stops working..
How fast markets fix themselves. If quickly, waiting is sensible. If slowly, waiting is cruel. Both sides draw the same diagrams. They disagree about the speed.
🧠 Economics now
The newest ideas fix two things the old model missed: people are not calculators, and resources run out.
| Idea | What it says | Example |
|---|---|---|
| Loss aversion | losing hurts more than winning pleases | you try harder to avoid losing €10 than to win €10 |
| The default wins | whatever box is already ticked is what most people keep | enrol people in a pension automatically and most stay in |
| A nudge | change how a choice is presented, not the options | opt-out instead of opt-in: same choice, same money |
| Circular economy | design things to be repaired, resold and reused | a phone that opens, instead of one glued shut and binned |
Important: Resources are a factor of production. Use them once and the PPC from 1.1 eventually moves inwards. Economy, society and environment each limit the other two. That is interdependence.
✍️ Worked examples
Only the circular economy has been asked about directly. The rest of this topic is how you argue every other answer.
A text describes a phone maker that takes back old handsets, repairs them and sells them again. Define the term circular economy.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Now the distinction every essay leans on.
Two claims: "Raising the minimum wage costs some jobs" and "The minimum wage should be raised anyway." Using these two claims, explain the difference between a positive and a normative statement.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
And the move that turns a description into an argument.
Explain why economists disagree about how a government should respond to a recession.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
✅ Quick self-check
Tap each card to check yourself.
What does ceteris paribus mean, and why do diagrams need it? All other things being equal: change one thing, hold the rest still. Shift two curves at once and nobody can tell which one caused what.
Why is a model deliberately unrealistic? So you can see one relationship. A map drops every tree to show the route. Unrealistic is fine; useless at predicting is not.
"The moon is made of cheese." Positive or normative? Positive. It can be checked, and it is false. Positive means settle it with evidence, not correct.
Equity or equality: a tax that takes more from higher earners? Equity: everyone gets what is fair. Equality would be the same tax for everyone. Choosing between them is a value judgment.
Why is water cheap and a diamond expensive? Price follows what one more is worth. You have plenty of water, so the next glass is worth almost nothing. Diamonds are scarce.
Why can cutting wages make a slump worse? Workers are also customers. Lower wages mean less spending, so firms sell even less. That was Keynes's point.
What is a nudge? A change to how a choice is presented, usually the default, that shifts what people pick without removing any option.
What is surplus value? Marx's word for the gap between what a worker produces and the wage they are paid. It goes to whoever owns the machines.
Exam tips
- Shift one curve at a time. Open a diagram answer with assuming nothing else changes.
- Before you answer a claim, ask: could evidence settle it? If yes, positive. If it needs should, normative, so say whose values.
- Equitable and equal are not the same word. Questions are set on exactly that.
- The model is unrealistic says nothing. Name the assumption, then say what changes if it fails.
- Tie each economist to the problem they were answering: Smith and the baker, Keynes and the 1930s, Friedman and the 1970s.
- Some economists would argue carries nothing. Name who, and why.
- Link the circular economy to factors of production. That is what makes it economics rather than recycling.