Question

What is the difference between positive economics and normative economics? Between microeconomics and macroeconomics?

Short answer

Positive economics is objective and testable and describes how things are, while normative economics is subjective, untestable, and describes how things should be. Microeconomics focuses on individual units in an economy, while macroeconomics studies the economy as a whole.

Step-by-step solution

Define Positive and Normative Economics

Positive economics concerns objective and fact-based statements - explaining and describing how things are. Normative economics presents subjective and value-based statements, which suggest how things should be. In other words, positive economics deals with what ‘is,’ while normative economics deals with what ‘ought to be.’

Differences between Positive and Normative Economics

Positive economics can be tested and either confirmed or refuted, while normative economics, by reason of being subjective and value-based, can't be tested. It remains an opinion or belief about how economics should operate.

Define Micro and Macroeconomics

Microeconomics is the study of individual units in an economy like a household, a firm, or an industry. Macroeconomics, on the other hand, is the study of the economy as a whole, including inflation, unemployment, and economic growth.

Differences between Micro and Macroeconomics

Microeconomics focusses on understanding the economic behavior at an individual level whereas, macroeconomics focusses on broader economic phenomena that affect entire economies. The former would analyze how a specific company could maximize its production and capacity so it could lower prices and better compete in its industry. The later would look at economic factors such as national productivity, interest rates, and inflation rates.

Key concepts

Positive Economics

Positive economics is like the detective of the economic world. It focuses on facts and evidence, striving to paint a clear picture of how things really work in our economy. This branch of economics deals with objective situations and can be tested through experiments or observations.

For instance, when economists say, "An increase in taxes will result in decreased consumer spending," they are making a positive economic statement. It's a claim that can be tested through data and statistical methods to check its validity. This kind of analysis is crucial for understanding cause-and-effect relationships in the economy.

• Objective and fact-based
• Describes how the economy functions
• Can be tested or validated

This scientific approach is essential because it provides a foundation on which economic policy can be built and helps policymakers make informed decisions.

Normative Economics

Normative economics, on the other hand, is a bit like the opinion column in a newspaper. It expresses opinions and suggests policies based on values and beliefs. This part of economics asks questions about what should be rather than what is.

Statements like "The government should reduce taxes to increase people's disposable income" fall into this category. These are based on personal values or societal goals and cannot be tested for their truthfulness in the same way as positive economics. Instead, they often spark debates and discussions about what policies would best serve the public good.

• Subjective and opinion-based
• Suggests how the economy should function
• Cannot be tested scientifically

Normative economics plays a key role in shaping economic policy, as it highlights the desirable objectives for society.

Microeconomics

Microeconomics zooms in to focus on individual actors within an economy, like households, firms, and industries. It's like looking at how a small business plans its budget, sets prices, and competes in the market.

This field analyses factors such as:

• The decision-making processes of individual consumers and firms
• The dynamics of supply and demand in specific markets
• Pricing of goods and services

Understanding microeconomics helps us grasp how companies maximize the efficiency of their resources, manage costs, and how they might respond to changes such as a new tax.

It's all about the small details that together create the bigger economic picture.

Macroeconomics

Macroeconomics takes a step back to look at the economy as a whole, much like viewing a vast city from above. It deals with broad phenomena that affect entire nations and even global economies.

Key areas include:

• National productivity
• Unemployment rates
• Interest and inflation rates

When macroeconomists analyze economic policies, they consider how these will impact the overall economic health. For example, they might assess how a change in interest rates could affect national investment or how government spending could reduce unemployment.

This comprehensive view helps policymakers understand the broad trends and potential long-term outcomes of their economic decisions.