<1.2 ECONOMIC METHODOLOGY>

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"A SOCIAL SCIENCE is defined as any branch of academic study or science that deals with HUMAN BEHAVIOUR in its social and cultural aspects." 

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"...so what?"

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"...well in unit 1.1, we learned that scarcity impacts the behaviour of the owners of scarce resources as they must make choices and decisions regarding how they allocate these resources to satisfy the three economic questions; therefore, we can conclude that ECONOMICS IS A SOCIAL SCIENCE."

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"That's right, there is another important factor in play, that being the weather, so in order to isolate the impact price has on the quantity demanded for umbrellas, need to keep the weather conditions fixed/constant. 

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"Therefore, for the relationship to be tested, we must make it clear from the start that a higher price will lead to a fall in quantity demanded, assuming all other variables stay the same."

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"But just to be fancy, instead of using the phrase 'assuming all other variables stay the same,' we use the Latin phrase...."

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"That's right, by comparing the extra 'additional' benefit received against the extra 'additional' cost of each subsequent unit, (which is basically the 'opportunity cost,') and only stopping when the opp. cost is considered greater than the benefit."

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"This is called 'marginal analysis' and is the method used by economists to 'quantify' decision-making. This marginal approach is essential because resources are finite, yet wants are unlimited; therefore, every choice involves a trade-off. By evaluating each incremental unit separately, economists can determine whether the social benefit of producing one more unit outweighs the social cost of diverting resources away from their next best alternative use."

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--TASK--

"Use the castaway example above to explain the purpose of marginal analysis in economic methodology."

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--THINK AHEAD--

"It's common to accept that a higher price will lead to a fall in quantity demanded right? "So what's going on here then?"

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"Let's open more IBDP and A-level classes now!"

"We can't make that decision just yet as the school building doesn't have any spare capacity; we will have to wait at least 5 years, when the possibilities are much wider

Do you remember the ceteris paribus condition? One of the variables that is kept constant is the timescale, as 

We live in a world of change. Change is all around us in

our lives, our work and in the ways in which economies

function. In order to take change into account, it is oft en

necessary to specify the time dimension; in other words,

to assess how over time change can infl uence the concepts

that economists are seeking to model and explain. Th is

can be done very eff ectively in terms of the factors of production.

Th e short run is a time period in which it is possible to change only some inputs. Typically it is when labour, a variable factor of production can be increased or decreased to change output. So, with all other factors of production remaining the same (ceteris paribus), a firm taking on more workers may be able to increase its output. In the long run, it is possible for all factors of production or resources to change. So, in the long run, a firm may improve the quality and quantity of its capital by building a new factory to increase its output. This will usually allow it to be more efficient since the firm has had time to evaluate how best this can be done successfully and efficiently. The very long run is where not only are

all factors of production variable, but all other key inputs

are also variable. Th ese key inputs can include technology,

government regulations and social considerations.

Very long run: time period when all key inputs into

production are variable.

KEY TERM

It should be clear that it is not possible to put an exact

timescale on any of these time periods. Just what they are

likely to be will depend on particular circumstances.