Scarcity, Choice and Opportunity Cost: Question 8

Worked solution

Part (a): Why this is a positive statement

A positive statement is a claim about what is, or what would happen, that is testable against evidence and contains no judgement about what should happen. A normative statement contains a value judgement and cannot simply be proved right or wrong by evidence.

The rail economist’s statement predicts a specific, testable relationship: if the price of off-peak season tickets falls by 10%, ceteris paribus, more passengers will buy them. This is a factual claim about cause and effect that could, in principle, be checked once the price cut actually happens, by comparing passenger numbers before and after. It says nothing about whether the rail operator should cut prices, or whether doing so would be fair or desirable, so it is positive, not normative.

Part (b): The ceteris paribus assumption here

Ceteris paribus means “other things being equal.” It is used to isolate the effect of one variable (here, the season ticket price) on another (here, passenger numbers) by assuming that every other relevant influence on passenger numbers stays constant while that one relationship is examined.

One specific “other thing” the statement is implicitly assuming stays unchanged is the price of substitute forms of transport, such as bus fares or the cost of driving (fuel prices, parking charges). If bus fares or fuel prices changed at the same time as the rail price cut, the change in rail passenger numbers would reflect both influences at once, not the rail price cut alone.

Part (c): Discussing how reliable the prediction is likely to be

The ceteris paribus assumption is a simplifying device, and in the real world it is unlikely to hold exactly. Several other relevant factors could easily move at the same time as the season ticket price cut: bus or fuel prices might rise or fall independently, the overall amount of commuting could change (for example, if more employers allow working from home), or local incomes could shift. If any of these move in the same direction as the price cut’s effect, the actual rise in passenger numbers could be even larger than predicted; if they move the other way, the rise could be much smaller, or passenger numbers could even fall despite the cheaper tickets.

This means the statement is unlikely to be reliable as a precise, quantitative forecast of how many extra passengers will buy season tickets, because the size of the change depends on exactly how much these other factors move, which the statement does not, and cannot, account for. However, the general direction implied by the statement, a lower price leading to higher quantity demanded, reflects a very well-established economic relationship (the law of demand), so it is likely to remain broadly reliable as a qualitative prediction as long as other relevant factors do not move by an unusually large amount in the opposite direction at the same time.

Overall, then, the extent to which the ceteris paribus assumption undermines the statement’s usefulness depends on what is being asked of it: it is a reasonably reliable guide to the direction of the change, but an unreliable guide to the precise size of the change, since the real world rarely holds every other relevant factor constant.

Final answers

• (a) It is positive, a testable prediction with no value judgement about what should be done
• (b) Ceteris paribus $=$ “other things being equal”; e.g. it assumes the price of substitute transport such as bus fares stays unchanged
• (c) The assumption makes the statement an unreliable guide to the precise size of the change in passenger numbers, since other relevant factors are unlikely to stay constant in reality, but it remains a broadly reliable guide to the direction of the change