1.5 - Economic Methodology
Positive and normative statements in economics
Positive economics focuses on objective facts that can be tested and verified through evidence. It deals with statements that describe what is happening in the economy without expressing opinions.
Normative economics involves subjective views and judgments about what should happen. It includes statements that reflect beliefs about right and wrong or desirable outcomes.
Positive statements
Positive statements are factual claims that can be proven true or false using data or observation.
Examples include:
- The national debt has risen over the past year.
- Share prices are expected to drop by 15% in the coming months.
Normative statements
Normative statements express opinions or value judgments about what ought to be, often involving ideas of good, bad, fair, or unfair.
Examples include:
- All citizens deserve access to free medical services.
- The central bank ought to focus on reducing unemployment rather than controlling inflation.
The scientific approach in economic analysis
Economics applies scientific methods to study behaviour and phenomena, using logic, hypotheses, and evidence to build understanding.
Role of logic in economic thinking
Logic helps economists reason through possible outcomes of economic actions, often using mathematical frameworks to explore relationships between variables.
Role of hypotheses in economics
Hypotheses are initial educated guesses about economic causes and effects, such as the idea that higher incomes lead to increased spending on goods.
Role of empirical evidence
Empirical evidence consists of real-world data and observations collected to test hypotheses, allowing economists to confirm or challenge their ideas.
Steps in the economic analysis process
- Observe an economic pattern, such as increased sales of premium products in stores.
- Develop a hypothesis, for example, that introducing variety boosts consumer purchases.
- Gather and test evidence from various locations and periods.
- Refine the hypothesis if supported, or adjust it if contradicted.
Process of refutation
Economic ideas are evaluated based on their ability to explain and forecast accurately. If data consistently contradicts a hypothesis, it must be discarded or altered to better fit the evidence.
Economic theories and models
Theories and models simplify complex economic realities, helping to illustrate key relationships and predict outcomes.
Economic theories
Theories provide well-supported explanations of economic events, built from tested hypotheses and backed by evidence. They aim to clarify why certain patterns occur in the economy.
Economic models
Models are simplified representations derived from theories, used to show connections between variables like prices and demand. They make assumptions to focus on core ideas.
The ceteris paribus assumption
Ceteris paribus, meaning "all other things remaining equal," is a key assumption in many models. It isolates the impact of specific variables by holding others constant, allowing clearer analysis of cause and effect.
Value judgments and equity in economic policy
Even in objective analysis, economists incorporate subjective choices, particularly when advising on policies. Concepts like equity and equality highlight how values influence economic decisions.
Value judgments in policy-making
Positive economics involves some subjectivity, such as selecting which issues to study or methods to use. These choices reflect personal or societal values, affecting policy recommendations.
Equity and equality
Equality refers to distributing income or resources so that everyone gets an identical share, regardless of individual circumstances.
Equity involves allocating income or resources in a manner seen as fair or just, which can vary based on differing views of fairness. Equity is inherently normative because ideas of justice differ among people. The terms are sometimes used similarly, with equity often meaning a reduction in overall inequality to achieve greater fairness.