How do Economists Approach the World? (DP IB Economics: HL)

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Facing rapid inflation, the central bank of Japan has raised interest rates, expecting this to reduce consumer spending and slow down inflation. Critics argue that the outcome of this policy may depend on factors such as global energy prices and household savings rates, which were not considered. Economists typically use the assumption of ceteris paribus when analysing such measures.

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In Switzerland, a debate over minimum wage increases has been framed by both factual and opinion-based arguments. On one side, economists use positive economics to highlight how wage hikes have affected employment rates in similar countries. On the other hand, some critics make normative economics arguments about fairness and workers' rights.

Define the term normative economics indicated in bold (Text F, Paragraph 2).

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In the late 18th century, Adam Smith argued that markets function best when left to operate freely, without heavy government intervention. His concept of the invisible hand laid the foundation for modern economic liberalism.

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In the 19th century, debates about the structure of society and the economy intensified, with some thinkers like Karl Marx offering radical critiques of how resources were distributed in capitalist systems. His views on the relationship between workers and owners were widely discussed.

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A 19th-century economist formulated a principle that focuses on the relationship between production and consumption. The idea, often referred to as Say’s Law, is central to many classical economic theories and has been debated by later economists.

Define the term Say’s Law indicated in bold (Text D, Paragraph 1).

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A growing number of companies are adopting business models that minimise waste and promote sustainability. Advocates of the circular economy believe that this approach can address many of the challenges posed by resource depletion, in contrast to the more traditional linear economy model.