Key Idea: Topic 1.2 explains how economists think: they build models, use assumptions like ceteris paribus, distinguish positive from normative statements, and acknowledge the limitations of their tools.
✅ Core definitions
- Economic model
- A simplified representation of reality used to understand, explain, and predict economic behaviour — like a map that strips away detail to show key relationships.
- Ceteris paribus
- Latin for 'all other things being equal' — economists change ONE variable while holding everything else constant to isolate cause and effect.
- Positive statement
- A factual claim that can be tested with evidence (can be proven true or false). Does NOT have to be true — just testable.
- Normative statement
- A value judgement about what SHOULD or OUGHT to be. Based on opinions, not provable with data.
- Correlation
- Two variables move together — but this does NOT prove one causes the other.
- Causation
- One variable actually causes a change in another.
Look for 'should', 'ought to', 'better', 'fairer' — these signal normative statements. A positive statement doesn't have to be TRUE — 'the moon is made of cheese' is positive because it CAN be tested.
🔬 Why economists use models
- The real world is too complex to study directly — models isolate key relationships
- Common IB models: demand/supply, PPC, AD/AS, circular flow of income
- Models use assumptions: rational behaviour, ceteris paribus, perfect information, many buyers/sellers
- Models allow testable predictions — 'if price rises, quantity demanded falls, ceteris paribus'
📊 Positive vs normative — the key distinction
Positive statements: 'What IS?' questions. Can be tested with evidence. 'Inflation is 3%' ✓. 'A tariff raises prices' ✓. Economists can agree on these.
Normative statements: 'What SHOULD be?' questions. Based on values and opinions. 'Inflation is too high' ✓. 'The government should cut taxes' ✓. Economists often disagree on these.
⚠️ Limitations of economic models
- Simplifying assumptions may not hold — people aren't always rational; they are emotional, impulsive, and biased
- Ceteris paribus rarely holds — in reality, many variables change simultaneously
- Data limitations — time lags, measurement errors, informal economy not captured, sampling bias
- Correlation ≠ causation — ice cream sales and drowning both rise in summer (third variable: heat!)
- Despite limitations, models are still useful — they identify patterns, enable predictions, provide a common language
- 'All models are wrong, but some are useful' — George Box
- Discussing limitations in essays is a powerful evaluation technique for top marks
🤷 Why economists disagree
- Different models — different theoretical frameworks lead to different predictions
- Different values — normative disagreements about fairness, priorities, trade-offs
- Different data interpretation — same data can be read differently, especially when messy
- Complexity — the economy is shaped by psychology, politics, culture, and technology simultaneously
Strong exam structure: 'This model predicts X, however in reality Y may occur because the assumption of Z may not hold.' This earns evaluation marks consistently.