Exercises: Economics as a science

Explain in your own words why economics is called a social science: what it studies, how it works (observe, measure, test) and how it is similar to and different from a natural science like biology. What is special about studying people's decisions?

Classify these statements into positive (describe what is and can be tested with data) or normative (express opinions on what ought to be):

1. a) 'Youth unemployment exceeds $25\ \%$ in the state.'
2. b) 'The municipality should lower business taxes for stores in the city center.'
3. c) 'When bus fares go up, fewer people use it.'
4. d) 'Pensions must be raised whatever the cost.'
5. e) 'Last year's inflation was $3\ \%$.'

The diagram shows the wall display that the school economics club uses to organise the month's news: on one side, those looking closely (microeconomics); on the other, those looking at the country as a whole (macroeconomics). One card is left unplaced.

1. a) The missing card says: 'The government raises the minimum wage nationwide'. State which box it belongs in and explain why.
2. b) Write two new cards for each box with news stories you make up.

Classify each headline according to two criteria: micro or macro, and positive or normative. Justify your answer for one of them.

1. a) 'Olive oil prices double due to poor harvest.'
2. b) 'Mexico should invest more in solar energy.'
3. c) 'Unemployment nationwide falls to $11\ \%$.'
4. d) 'The ice cream parlor in the square closes down due to rent increase.'

A tube map does not look like the real city: the streets are drawn straight and the distances are distorted. And yet, it gets you anywhere. Use this example to explain what an economic model is, what the purpose of simplifying reality is, and what is lost when doing so. Give a typical assumption of economic models (for example: 'all buyers know all prices') and comment on whether it is realistic.

'If ticket prices go up, fewer are sold, ceteris paribus.' Explain what that Latin phrase means ('all other things equal') and why economists use it so much. Give an example where it does not hold true: the price goes up and yet more tickets are sold.

The municipality wants to know if the new bike lane has increased sales for stores along the avenue.

1. a) Design the test following the economist's method: what would you observe, what data would you collect (and for which periods), and what would you compare it with?
2. b) Explain why it is harder to test theories in economics than in a laboratory: what other things might have changed at the same time (sales, road work, weather)?

The class is debating whether to ban cars in the town center.

1. a) Write two positive statements and two normative statements that could be heard in that debate.
2. b) Explain why it is useful to separate one from the other during a discussion: which ones are resolved with data and which ones depend on values? What happens when they are mixed up?

A 4th-year ESO student comments in Economics class: "Models like the Circular Flow of Income or the Production Possibility Frontier are useless because reality is infinitely more complex: in the real world there are millions of people, banks, governments, and foreign trade that these simplistic diagrams completely ignore."

1. a) Rebut their argument using the analogy of a transit map app: explain what would happen if a subway or road map tried to reproduce reality with complete accuracy, and conclude why simplifying through assumptions is a virtue and not a flaw of scientific models.
2. b) Taking the basic Circular Flow of Income model (only households and firms, goods market, and factor market) as a reference:

• Justify an essential economic relationship that this model allows you to understand clearly.

• Point out a real economic phenomenon that is impossible to analyze with this simple model, and what agent or market would need to be incorporated into it to be able to explain it.

1. c) State a criterion that determines when a simplifying assumption is valid and when it invalidates the conclusions of an economic model.