A) Thinking like an economist: developing models and making assumptions

Economists try to understand the economy through making assumptions to help them create models. These assumptions help to simplify their analysis as they do not have to deal with every variable within the economy at the same time.

For example, the production possibility frontier (PPF) simplifies the economy down to two products. This makes it easier to illustrate the maximum productive potential of an economy, opportunity costs and efficiency.

Models can also be used to question how realistic these assumptions are. For example, an economy may find it difficult to maintain full capacity and it is likely to be unsustainable for an economy to operate at a point outside its PPF for a long period of time.

B) The use of the ceteris paribus assumption in building models

The majority of models used in economics assume that all other things remain equal. This is known as ceteris paribus. It allows economists to focus on one particular change within the economy at a time.

For example, when identifying the effect that a decrease in interest rates may have on aggregate demand, economists can focus on the components of aggregate demand while assuming other determinants stay the same.

In reality, other factors may also change. For example, the impact of a decrease in interest rates may depend on business confidence. If confidence is low, the increase in investment may be relatively small and therefore the overall increase in aggregate demand may also be lower than expected.

Overall, ceteris paribus helps economists simplify their analysis by looking at the effect of one change at a time.

C) The inability in economics to make scientific experiments

Rather than proving the relationship between two variables through scientific experiments, economists often do this through the use of simplified models and economic data.

For example, the Phillips curve helps to explain the relationship between employment and inflation. Models such as this are created using research into the relationships and correlations between different economic statistics.

There are many models used in economics. These models make it easier for economists to explain changes within the economy and to consider the likely effect that a policy change may have.