Question

Briefly explain which of the following statements represent positive analysis and which represent normative analysis. a. A 50-cent-per-pack tax on cigarettes will lead to a 12 percent reduction in smoking by teenagers. b. The federal government should spend more on AIDS research. c. Rising wheat prices will increase bread prices. d. The price of coffee at Starbucks is too high.

Short answer

a. Positive Analysis\ b. Normative Analysis\ c. Positive Analysis\ d. Normative Analysis

Step-by-step solution

Analysis of Statement - a

The statement 'A 50-cent-per-pack tax on cigarettes will lead to a 12 percent reduction in smoking by teenagers' is based on a cause and effect relationship, indicating what might happen if a certain action is taken. This falls under Positive Analysis.

Analysis of Statement - b

The statement 'The federal government should spend more on AIDS research' states an opinion about what should be done. This falls under the category of Normative Analysis.

Analysis of Statement - c

The statement 'Rising wheat prices will increase bread prices' is hypothesizing a cause and effect relationship due to the rise in the cost of a basic resource, or commodities, which is a statement of fact or consequence, leading to it being classified as a Positive Analysis.

Analysis of Statement - d

The statement 'The price of coffee at Starbucks is too high' is based on a subjective value judgement rather than an objectively measurable fact, which classifies it as a Normative Analysis statement.

Key concepts

Economic Analysis

Economic analysis involves a methodical approach to study the actions, distribution, and production of goods and services within an economy. It is concerned with understanding and predicting economic phenomena and the effects of economic events on individuals, businesses, and society.

For instance, when looking at statement (a) regarding a tax on cigarettes, economists would use data, statistical methods, and economic theories to predict the outcome of such a policy. This involves analyzing historical data on smoking habits, the elasticity of demand for cigarettes, and other factors to predict how a tax might affect smoking rates among teenagers.

Economic analysis often requires simplifying assumptions to make complex systems more understandable. It helps policymakers and businesses make informed decisions by providing them with a clear picture of potential outcomes and enabling the evaluation of different policy scenarios through cost-benefit analysis.

Cause and Effect Relationships in Economics

Understanding cause and effect relationships is pivotal in economic analysis. It enables economists to predict the consequences of events, policies, and behaviors. These relationships are based on the principle that certain actions or changes lead to specific outcomes.

For example, in statement (c), the cause-effect relationship between rising wheat prices and bread prices is explored. Economists use this reasoning to deduce that if the cost of wheat, which is a significant input in bread production, increases, it will most likely lead to higher bread prices due to increased production costs. By identifying these kinds of relationships, economists can create models to forecast how changes in one economic variable will impact others.

Analyzing these relationships also involves ruling out spurious correlations and ensuring that the relationship truly represents causation rather than a mere association.

Value Judgements in Economics

Value judgements in economics are statements or opinions that reflect personal beliefs, ethics, or norms rather than empirical evidence. They are subjective and often involve assertions about what ought to be rather than what is empirically provable.

When examining statement (d), which mentions the price of coffee being 'too high,' it is evident that this is based on a value judgement. The statement is not testing an objective hypothesis or examining causality; instead, it expresses a personal opinion about the fairness or affordability of the price. Value judgements are vital in policy debates as they reflect societal values and can influence decision-making. However, it is crucial for the distinction between value judgements and empirical analysis to be clearly made, as mixing the two can lead to confusion and flawed policy prescriptions.