Economics is the study of how individuals and societies allocate scarce resources to satisfy unlimited wants. It is a dynamic and complex social science.
What is economics?
Economics is the study of how people make choices to satisfy their needs and wants in the context of scarce resources. These choices occur at many levels—from individuals deciding how to spend their money, to firms choosing what goods to produce, to governments planning how to use their national budget.
The basic assumption in economics is that resources are finite, while human wants are infinite. This fundamental imbalance gives rise to the economic problem: how to allocate scarce resources efficiently to meet the most pressing needs.
Economists examine questions such as:
What goods and services should be produced?
How should these goods and services be produced?
Who should receive and consume these goods and services?
Economics is often divided into two main branches:
Microeconomics, which focuses on individual agents such as consumers, workers, and firms.
Macroeconomics, which looks at the economy as a whole, including topics like inflation, unemployment, and economic growth.
Despite its analytical nature, economics is not just about numbers and graphs—it is fundamentally about human behaviour and decision-making, which is why it is classified as a social science.
Economics as a social science
Economics is called a social science because it studies human behaviour and the relationships among individuals and groups within a society. Like other social sciences—such as sociology, psychology, and political science—economics seeks to understand how people behave, make decisions, and interact under specific circumstances.
Unlike the natural sciences, which study the physical world, the social sciences focus on the complexities and unpredictability of human behaviour. Economics, therefore, involves both empirical observation and theoretical modelling to understand patterns, identify trends, and provide insights into real-world issues.
Economists use systematic methods to study how people respond to incentives, how markets operate, how governments affect economic outcomes, and how institutions influence behaviour.
Key features of economics as a social science:
Studies human choices and behaviour in the context of scarcity.
Uses models to explain and predict behaviour.
Tests theories against real-world data.
Evaluates policies based on both evidence and ethical values.
Acknowledges the role of institutions, culture, and social norms.
Because human decisions are influenced by numerous factors—some rational, some emotional, some cultural—economics must account for this complexity in its analysis.
Differences between economics and natural sciences
While economics uses many of the same scientific principles as disciplines like physics or biology, such as hypothesis formation, data collection, and testing, there are fundamental differences in methodology and application.
Controlled experiments
Natural sciences rely heavily on controlled laboratory experiments, where variables can be isolated and manipulated in a closed environment. For example, a chemist can conduct an experiment to test how a substance reacts under heat by controlling all the inputs and conditions. This produces clear and repeatable results.
In economics, such controlled experimentation is rarely possible due to:
The impossibility of isolating economic variables.
The ethical issues of manipulating people's livelihoods.
The vast number of interacting factors in real-life economic systems.
Predictability and consistency
In the natural sciences, the behaviour of atoms or molecules is predictable and consistent under given conditions. However, in economics, human behaviour is far more variable and unpredictable. People may act irrationally, change their minds, or behave differently in similar situations.
For instance, two individuals earning the same income may save vastly different amounts, influenced by personal habits, cultural background, expectations about the future, or access to financial advice.
Replicability of results
A physics experiment repeated under the same conditions will yield the same result every time. In economics, replicating results is much harder because human behaviour and external conditions constantly change.
Economic outcomes are affected by politics, history, social institutions, media influence, and global events—factors that are hard to isolate or replicate.
Why economists cannot conduct laboratory experiments
Economists face significant practical and ethical limitations in conducting experiments, especially compared to scientists in the natural sciences.
1. Human unpredictability
Humans are not mechanical units; their actions are influenced by a wide range of internal and external factors. People do not always respond in the same way to incentives, making it difficult to establish general laws of behaviour.
For example, increasing taxes might lead some individuals to work harder to maintain their income, while others might work less due to a reduced incentive.
2. Ethical concerns
Many economic questions involve real people and real outcomes, which raises ethical issues when trying to test hypotheses through experimentation.
It would be unethical, for example, to randomly impose unemployment on a group of people just to study its effects on consumption, or to deprive certain households of healthcare to test policy outcomes.
3. Complex interrelated factors
In real-life economies, multiple factors influence outcomes at the same time. It is extremely difficult to control for these factors in a way that would make results scientifically robust.
As a result, economists must rely on alternative methods such as natural experiments (where policy changes occur in one region but not in another), longitudinal studies, or simulation modelling.
The importance of observation and modelling
To overcome the inability to use controlled experiments, economists rely on:
Observation of real-world events
Model-building to represent economic relationships
Statistical and mathematical analysis to test theories
These tools allow economists to analyse how people respond to changes in prices, income, government policy, and other variables.
Observation
Observation involves gathering data from actual economic activities, such as:
Employment rates
Consumer spending patterns
Business investment
Trade flows
Government revenues and expenditures
This data is often collected by national statistical agencies, central banks, research institutions, and private firms.
Economists then apply statistical techniques to identify patterns and relationships in the data. While this approach is not foolproof, it helps economists make informed predictions and evaluate the likely effects of policy changes.
Modelling
An economic model is a simplified representation of reality, built to highlight key relationships and mechanisms. Models are used to:
Illustrate economic theories.
Make forecasts.
Conduct simulations of policy scenarios.
Test the impact of changing one or more variables.
Models require assumptions to narrow focus. For example, a basic demand model may assume:
Consumers act rationally.
All other variables remain constant (known as ceteris paribus).
The good is normal (i.e. demand increases as income rises).
Models can be:
Descriptive (e.g. supply and demand diagrams).
Mathematical (e.g. equations showing GDP = C + I + G + (X – M)).
Computational (e.g. simulations using computer algorithms).
While models are not perfect representations of reality, they are essential tools for organising economic thinking and guiding decision-making.
Statistical analysis and its role in economics
Economists use various quantitative methods to analyse data and test models. These methods allow economists to separate causation from correlation and measure the strength of relationships between variables.
Key techniques:
Regression analysis: Examines how one variable is affected by changes in another, while controlling for additional variables.
Time series analysis: Studies data collected over time to identify trends, cycles, and long-term patterns.
Cross-sectional analysis: Compares data across different groups or regions at the same time.
Panel data analysis: Combines time series and cross-sectional data to analyse multiple variables across time and space.
These techniques help economists draw conclusions about economic behaviour, evaluate the success or failure of policies, and forecast future developments.
Influence of human behaviour, values, and institutions
Unlike natural sciences, economics must always consider the human element, which includes unpredictable behaviour, personal and cultural values, and institutional structures.
Behavioural influences
Traditional economic theory assumes rational behaviour, but in reality, individuals:
Make decisions based on habits and emotions.
Exhibit bounded rationality (limited ability to process information).
Fall prey to cognitive biases, such as loss aversion or confirmation bias.
Behavioural economics incorporates insights from psychology to better understand and predict economic behaviour that deviates from standard models.
Role of values and ideologies
Many economic debates involve value judgements, especially in areas like taxation, welfare, healthcare, and environmental regulation.
For example:
Saying “increasing minimum wage leads to unemployment” is a positive statement—it can be tested.
Saying “the government should increase the minimum wage to reduce poverty” is a normative statement—it depends on one’s beliefs and values.
Even the choice of what to study, what data to collect, or which model to use may reflect underlying ideological assumptions.
Influence of institutions
Economic outcomes are shaped by institutions—the formal and informal rules that govern economic life. These include:
Legal systems (property rights, contract enforcement).
Political systems (democracy vs. authoritarianism).
Financial institutions (banks, central banks).
Cultural norms and social traditions.
For example, the same economic policy (such as deregulation) may produce very different results in countries with different institutional structures.
Economists must account for these institutional differences when developing models or offering policy recommendations, which adds complexity to their work and often makes universal prescriptions difficult.
FAQ
Economists use the assumption of ceteris paribus, meaning "all other things being equal," to isolate the effect of one variable on another, which is crucial for understanding cause and effect in economic relationships. While real-world conditions are constantly changing and the assumption is rarely true in practice, using ceteris paribus allows economists to focus on the direct link between two variables without interference from others. For example, when analysing how price affects demand, assuming ceteris paribus helps exclude the influence of income changes or advertising. Although the simplification may reduce realism, it greatly enhances clarity and analytical precision. Without it, economic models would be overwhelmed by complexity and impossible to interpret effectively. Ceteris paribus provides a starting point for theory-building, which can later be refined using real-world data and statistical techniques that attempt to control for other variables. It’s a vital tool in progressing from abstract theory to applicable policy insight.
While economists strive to base their analyses on objective data and empirical evidence, value judgements are often unavoidable in economic decision-making. Economists typically separate their work into positive economics—which involves testable and objective statements—and normative economics, which involves opinions and value-based statements. In practice, even when using positive analysis, economists must choose what to study, which data to prioritise, and how to frame conclusions—all of which can be influenced by personal or societal values. For instance, in evaluating healthcare policy, one economist may focus on efficiency, while another prioritises equity, each guided by different value judgements. To handle this, economists are transparent about their assumptions and acknowledge where value judgements influence their analysis. Peer review, debate, and empirical testing help limit bias. Though objectivity is the goal, economics is inherently linked to policy-making, where value-based decisions—such as fairness, welfare, or sustainability—play a major role.
Economic models are designed to simplify complex real-world interactions in order to make them understandable and analytically useful. Although they abstract away many details, their strength lies in identifying and focusing on key relationships between variables. For instance, a basic supply and demand model may ignore factors like marketing or brand loyalty, but it still provides essential insight into how prices and quantities interact in a market. These models help clarify underlying mechanisms, test hypotheses, and make predictions. Policymakers and businesses use them to simulate outcomes—such as how a tax increase might affect spending—without needing to observe the actual event first. While the assumptions may reduce realism, the trade-off is analytical power and clarity. Furthermore, as data availability and computing power increase, more complex and realistic models are developed, often using computer simulations. Ultimately, the usefulness of a model is judged by its explanatory and predictive value, not by how accurately it mirrors every detail of reality.
Institutional factors such as legal systems, government structures, cultural norms, and historical context play a major role in shaping economic outcomes and, therefore, the applicability of economic theories. A theory developed in one country may not work the same way in another due to different institutional settings. For example, theories assuming free-market efficiency may fail in countries with weak legal enforcement or widespread corruption, where markets do not function as intended. Similarly, consumer behaviour models that assume individualistic preferences may not be accurate in collectivist cultures where social expectations heavily influence choices. Institutional factors also affect the transmission of monetary and fiscal policy. For example, an increase in government spending might be effective in a well-regulated economy but may lead to inefficiencies or corruption in another. Economists must adjust models and expectations depending on the institutional environment. This underscores the need for context-specific analysis and caution when applying general theories universally.
Yes, economics can still be considered a science despite its predictive limitations because it uses scientific methods such as hypothesis testing, data analysis, and logical reasoning. The key distinction is that economics deals with human behaviour, which is inherently less predictable than physical phenomena. Unlike the natural sciences, where experiments can be tightly controlled, economics must account for a complex and ever-changing world filled with diverse motivations, constraints, and unforeseen events. Predictive inaccuracy does not disqualify economics from being a science; even in meteorology or medicine, predictions can fail due to complexity, yet these fields remain scientific. What makes economics a science is its systematic approach to understanding problems, building models, gathering evidence, and updating theories in response to new data. The goal of economics is not perfect prediction, but better-informed decision-making and understanding of how economic systems operate. The process of refinement and adaptation to new evidence is what maintains its scientific foundation.
Practice Questions
Explain why economics is considered a social science and how it differs from natural sciences.
Economics is considered a social science because it studies human behaviour and the allocation of scarce resources. Unlike natural sciences, economics cannot conduct controlled laboratory experiments due to ethical constraints and the unpredictability of human behaviour. Instead, economists rely on observation, theoretical models, and statistical analysis. While natural sciences use precise experiments with replicable outcomes, economic predictions are less certain due to varying individual responses and external influences. Furthermore, economic theories are shaped by value judgements, societal institutions, and cultural norms, which adds complexity not found in the more deterministic natural sciences.
Analyse why economists find it difficult to make accurate predictions about human behaviour.
Economists face challenges in predicting human behaviour because people do not always act rationally. Behaviour is influenced by emotions, social norms, habits, and incomplete information, making outcomes unpredictable. Additionally, economic environments are constantly changing due to external shocks, political changes, or global trends. Unlike in natural sciences, variables in economics cannot be isolated or controlled, and ethical constraints prevent experimentation. Moreover, individual differences in risk preferences and priorities complicate forecasting. Therefore, while models help simplify behaviour, their predictions often lack precision, as human decision-making rarely follows consistent, universally applicable patterns.
