Written by Tom Furber, economics tutor. | Published 24th January 2022. | Updated 10th August 2026.
Covers the following topics:
- 4.1.1.1 (economic methodology);
- 4.1.1.2 (economic activity: nature and purpose);
- 4.1.1.3 (economic resources);
- 4.1.1.4 (scarcity, choice and resource allocation).
Contents
Economic methodology
Economics as a social science
Economics is a social science – it studies human behaviour and interactions.
What are the similarities and differences in methodology between economics and other sciences?
- Economists cannot easily conduct scientific experiments as is the case for the natural sciences.
- Economists create models and use real-life scenarios to build those models. Other scientists also build models.
- When creating models, economists often assume other factors remain the same. This is the ceteris paribus assumption. Sciences similarly make these kinds of assumptions in experiments on real world data.
- However economists cannot usually rely on other factors remaining the same when dealing with data about the real economy. To conduct a fair test, you have to keep other factors equal.
Why is it difficult to conduct experiments in economics? An example.
Suppose you wanted to look at the effect of a rise in tax rates on the level of unemployment.
For example in the UK, the employer’s national insurance contribution rate increased from 13.8% to 15% of earnings above a threshold in April 2025. National insurance is effectively a type of income tax.
The problem is that so many things affect the level of unemployment. For example, minimum wages, workers’ skills, the size of the economy, the performance of individual sectors such as cars and more.
So, we cannot isolate the impact of the increase in employer’s national insurance contributions.
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Beyond the course – economists do experiment!
Economists do conduct some experiments in the field (in the real world) and in the lab (in a controlled environment).
For example, to investigate the effect of aid or policies to support the poor, researchers could randomly assign the treatment to some people but not others. This is frequently used in development economics. You can read more about it here in the case of microfinance, a type of lending to groups of entrepreneurs.
There are also lab experiments, where participants are invited to the lab to ask decision questions.
These approaches face their own advantages and drawbacks.
Economists also use “quasi-experimental” methods to get around the difficulties faced in designing experiments.
Statements and judgements
Positive statements are ‘objective’ statements that are testable.
- Example: a rise in the tax rate on cigarettes will reduce demand for cigarettes.
Normative statements are ‘subjective’ statements of opinion, involving value judgements.
- Example 1 – the government should ban smoking in public places.
- Example 2 – economic growth is more important than inflation.
Value judgements influence economic decision making and policy. For example a government might choose policies to reduce income inequality, for example higher taxes on the rich, if it believes income inequality is too high.
There are several factors that may influence people’s opinions about policies:
1. The testable or verifiable (“positive”) consequences,
2. Moral judgements.
3. Political judgements (for example, will a particular policy be popular or win votes).
The nature and purpose of economic activity
The main purpose of economic activity is to produce goods and services to satisfy needs and wants.
There are three key economic questions to consider about economic activity:
1) What to produce
- For example, should the economy produce cars or buses?
- In a “command” economy, the government decides what to produce.
- In a “free-market” economy, the free market (in other words the supply of and demand for goods) decides what gets produced.
- There are also “mixed” economies where both the free market and the government play a role in deciding what to produce.
2) How to produce
- Should firms use workers or machines for example?
- For example will machines replace some workers in the near future because robots can automate workers’ jobs?
- Truck driving could well become automated in the next decade for example. See the article here for a deeper discussion on economists’ perspectives on automation (beyond the course).
3) Who is to benefit – those most in need or those who can (or are willing to) pay the most?
- For example, in the free market those who pay the most benefit from the good. In a command economy the government may decide to give everybody the same amount of goods.
- In the UK for example, while most markets are free, there are some markets where provision does not depend on who pays the most. For example the National Health Service provides healthcare that is free at the point of use.
Economic resources
The four factors of production
Factors of production are inputs into the production process.
There are four types of factors of production:
Land – physical land as well as natural resources e.g. oil.
Labour – workers and their abilities.
Capital – machinery, software and factories.
Enterprise – the entrepreneur’s risk-taking, innovation and organisation of other factors of production to form a production process.
Exam technique tip
Use the acronym CELL (capital, enterprise, land, labour) to remember the four factors of production.
The environment
The environment is itself a scarce resource. This includes natural resources such as water, air, fossil fuels and forests.
• There are non renewable resources that cannot be replenished such as fossil fuels.
• There are renewable resources that can be replenished, for example solar energy.
• However if consumption rises more quickly than the resource can be replenished, then stocks could decline over time. Examples of this could include deforestation of the Amazon rainforest.
Scarcity, choice and the allocation of resources
The basic economic problem is scarcity. There are infinite wants and needs, but only a finite amount of resources.
Scarcity means we have to choose how scarce resources are allocated between different uses. Do we use workers to build skyscrapers, provide financial services, or as teachers?
Choices have an opportunity cost. Opportunity cost means the value of the next best alternative forgone when an economic decision is made.
For example, imagine choosing between watching a movie at the cinema or eating at a restaurant.
- If you choose the movie, the opportunity cost is the value of eating at a restaurant.
Other agents face opportunity costs. The government may have to choose between extra spending on the NHS versus extra spending on schools. Firms may have to choose between buying more machines or hiring more workers.
Practice questions for AQA Economics students
Here are two multiple choice questions on the topics above. Suitable as practice for AQA Economics students.
Question 1
Which one of the following statements is a normative statement?
A Increasing income tax rates leads to a fall in employment.
B Increasing income tax rates should lead to a fall in employment.
C Increasing income tax rates is beneficial.
D Increasing income tax rates will not reduce worker happiness.
Click for the answer
The answer is C. This statement is not testable.
Other statements are all testable. They make a testable claim about whether a change in one variable (income tax rates) affects another variable.
Common mistake: Note that just because a statement says “should”, it does not always mean it is normative.
Question 2
Which of the following statements is most likely to be true?
A In the context of factors of production, factories are classified as land.
B Economists do not make the ceteris paribus assumption.
C Economists build models while scientists do not.
D Economists face challenges when experimenting using real world data.
Click for the answer
The answer is D. Economists face challenges when experimenting on real world data.
This is because many other factors can change and influence the results. In other words, ceteris paribus does not hold in the real world.
Note factories, as an aid to production, are classified as capital. Land includes natural resources such as land but also oil and water.
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