SSC 102 LECTURES TOPIC ONE: The Nature of Economics The nature of a discipline is reflected in its definition, our starting point therefore is to examine the definition of economics. Economics has been defined variously by several authors. These definitions can be broadly divided into two. The first type of definitions is related to wealth and material welfare. The second type of definitions is related to scarcity of means, Wealth and welfare definitions: In the early tradition of the study of economics, the names “economics” and “political economy” were used as synonyms. The neoclassical economists led by Adam Smith in 1776, defined economics as a science of wealth. Other economists in the group include David Ricardo, J.B, Say, and F.A. Walker. Each of these scholars and social thinkers cast their wealth-based definitions of economics as follows. 1, Adams Smith’s definition: Economies is “An Inquiry into the Nature and Causes of the Wealth of Nations”. This definition forms the title of a book written by Adam Smith in 1776. According to this definition, economies is a field of study which is concerned with the study of the factors that determine the wealth of a country and how this wealth grows over time. In this way Adam Smith emphasized the production and expansion of wealth as the subject matter of economics. However the efficient use of the resources of production (factors of production- land, labour, capital and entrepreneurship) is implied by this definition. This is because the wealth of a country cannot grow without proper utilization of the productive resources. The production of wealth is the basis of this definition. 2. David Ricardo’s definition: David Ricardo’s contribution to the definition of economics was to shift emphasis from the production of wealth to the distribution of wealth. In the preface to his book, Principles of Political Economy, he wrote: “The produce of the earth ~ all that is derived from its surface by the united application of labour, machineries and capital is divided among three classes of the community, namely, the proprietor of the land, the owner of the stock of capital necessary for its cultivation and the labourers by whose industry it is cultivated.” He concluded that: “To determine the laws which regulate this distribution is the principal problem in Political Economy.” From the above discussions, David Ricardo’s definition can be fathomed as follows:can be defined as the field of study concerned with the distribution of Econom wealth produced by the united application of the factors of production. 1B. Say, a French economist, defined economics as “the study of ion: 3. J.B. Say’s defin the laws which govern wealth’” F.A. Walker's definition: The American economist, F.A. Walker, defined economics as “the body of knowledge which relates to wealth”. Criticisms of Wealth based definitions of Economics: The wealth based definitions were criticized on two grounds. a) Emphasis on Materialism: Social thinkers of the Christian society viewed economics as focusing on material higher spisiiual vaiues uf life. iu fat, wicalth aid pivspuity of tations, a9 agai Thomas Carlyle, a historian, was one of those who referred to economics as a ‘gospel ofmammon,’ on account of its elevation of wealth into an “object of scientific study.” Thus economics was regarded as a “dismal science.” However since immaterial things like health, education, good administration etc., which were not covered by the classical wealth definitions, are important for economic growth and development, hence the wealth -based definition has reduced the scope of economics. b) Ignore Man’s Behavour in relation to Wealth: The classical treatment of economics as a “science of wealth” assigned a secondary role to human beings in the creation of wealth. This is because the classicals did not stress on man’s behaviour in relation to wealth. In addition the classical wealth based definitions did not emphasise the promotion of human and social welfare as the ultimate objective of economics. In this way, wealth was treated as the end in itself whereas wealth is a means to an end. In reality the end is the welfare of man and society, wealth being a means to achieving this. The wealth based definitions led by Adam Smith’s definition eventually gave way to other definitions due to their limited applicability to the causes of wealth of nations, without a mention of applicability to individuals. 5. Alfred Marshal’s definition: Alfred Marshal, a neo-classical economist, led in the neo- classical welfare- based definition of economics. In an attempt to remedy the deficiencies inherent in the classical wealth definitions, he provided another definition by laying emphasis on man and his welfare. Accordingly he defined economics as follows: Economics is the study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being’. Note on pronunciation: “requisites” is pronounced “rek-wi-zits”This definition sees economies as the study of wealth on the one hand and as the study of human behaviour on the other. This definition regards wealth as the source of human welfare but does not regard it as an end in itself. In addition, Alfred Marshall separated economies from politics by using the term “economics” rather than” political economy” in his definition of economics. In this way Marshall elevated the study of economics to the realm of science by removing political influences in the analysis of economic issues. Three other things should be noted in this definition, 8) Economics is the study of man’s behaviour in relation to wealth: This shifts emphasis from the classical perception of economics as the study of wealth, making the study of ‘man’s action regarding how he earns and spends wealth prominent sicuse. The Uefiitivu makes it cicartnat economies seudies snan's life in the ordinary business of life. This connotes two things. First, economics is afield of study that relates to human society. Second, the economic aspect of society, rather than its religious, cultural or political aspects is the concen of economics. This is evident in the phrase “ordinary business of life” which means how man gets and spends his living (income). ) Economics aims at promoting social welfare: The end in economics is the attainment of well- being of the society. This is why economics is related to those activities which promote social welfare and excludes socially undesirable activities. Despite the improvement to the definition of economics contained in Alfred Marshall's definition, which made it to be widely acceptable for long, it suffered two main criticisms put forward by Lionel Robbins, a distinguished English economist. LU} Eeoumuies is a ovvi 1. Economics is not limited to material things: Materialism has to do with the possession of wealth in form of physical properties. Marshall’s definition, like the others before him, tend to view economics as being concemed with the possession of physical properties like land, houses, ships, machineries, equipment, rail system, vehicles, factories, airplanes tc. for the well-being of people, Robbins however point out that, economics is not only concemed with material properties alone but is also concerned with immaterial things i.e services, which have no physical existence. Thus services like professional singing, acting, dancing, teaching, marketing, banking ete. are also studied in economics since they command price. Thus, economics is concerned with all goods and services provided they command a price, whether they are material (tangible goods) or immaterial (intangible) goods. 2. Economics is concerned with searcity not welfare: Robbins pointed out that economics is the study of choice under conditions of scarcity and as such, is not concerned with welfare. Hence any welfare based definition of economics is inappropriate. This idea is supported by the fact that welfare is subjective, varying from person to person and from place to place. Thus an objective assessment of welfare promoting activities cannot be‘greed upon Fr instance, pring problems of goods like opium, liquor, and cigarettes, usually thought to be harmful to social welfare are studied in economics. If economies were concerned with welfare enhancement, pricing of these goods will not be studied in economics, But these goods are studied in economics because some people in the society Want them and they are scarce (limited in supply) in relation to demand for them, It is the carcity definition of economics that brings such goods under the study of economics. Thus economics studies all goods and services that have economic significance in the ‘sense that they command price regardless of whether they contribute to welfare or not. Scarcity based definition: In giving his definition of economics, Lionel Robbins observed that nature has not provided mankind enough resources to satisfy all wants, This leads to the option of making choice of witich waui vt uced an ccunviniv ageut lus iv saiisfy ai a puiut ia time. This ehvice is necessitated by the fact that economic agents such as individual households, business firms and governments have unlimited wants but limited resources (means) of ‘satisfying these wants. Furthermore, the limited resources have alternative uses. Thus economics is concerned with developing a systematically organized body of knowledge about rational choice making under conditions of scarcity. These three observations- unlimited wants, limited or scarce means and altemative uses- provide the tripod stand on which Robbins’ scarcity definition of economics rests. Accordingly, in his famous book titled “An essay on the Nature and the Significance of Economic Science” economics is defined as follows: Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses, T isnoteworthy to examine certain basic concep that emanate from the scarcity definition of economics. Consequently the following five concepts are discussed, 1. Ends “Ends refer tothe various human wants in the society. Two facts should be noted about the nature of wants. First they are unlimited, Second t hey are of varying importance. Wants are unlimited because in many cases they occur on a very repetitive basse. clothes, demonstration, foods ete. In other cases, 2. Scarcitythat manifests in the economizing behaviour of human beings. If there eee is scarcity economic problem will not exist and there would not be economics as a discipline. 3. Scale of preference This refers to a table or a list showing the various human wants arranged in order of importance. Given the fact that resources available are grossly inadequate to meet the unlimited human ; wants, an individual, a firm or a government is compelled to list all its wants and put them in order of importance such that the most importance ones are placed first and subsequently others are placed in a decreasing order to importance. 4. Choice of picfeicince a deuisivia would have iv be aad in choosing the most pressing and important needs of the economic agents. Choice making involves the consideration of alternative uses to which scarce resources can be put. The scale of preference then ensures that an optimal beneficial decision is made in the choice of wants that are satisfied. 5. Opportunity cost This refers to the worth of the choice that was made by the economic agent in terms of the alternatives that was left unfulfilled or unsatisfied. The opportunity cost of an item is what you give up to get that item. Opportunity cost arsis out of the fact that people face trade-offs. Hence, in every economic decision we make the worth is evaluated in terms of the alternative forgone. From the foregoing, it should be noted that scarcity is the reason for the study of economics, Scarcity means that society has limited resources and so cannot produces all the goods and Services people in the society want. Economies isthe study of how society manages its scarce resources. Without scarcity the field of study called economics will not exist. On the Subject Matter of EconomicsBy and large, the formulation ofa definition is a concise method of clarifying the subject matter of ficld of study. The scarcity definition given by Lionel Robbine has sharply defined the Scope of economics, It has delimited the field of economics by building a boundary wall around it. There can now be no misconception or confusion about the sphere of economics. Any problem marked by scarcity of means and multiplicity of ends, becomes ipso facto an economic problem, and as such, a legitimate part ofthe science of economies, This is because economics is concemed with a special aspect of human behaviour, which is allocating scarce means among Competing ends. Consequently the subject matter of economies includes the problem of angen’ the allocation of searce resources by the household, business firms and the government in the administration of public resources. Thus the subject matter of economics includes solving the scarce resource allocation problems in consumption by the household, production by firms, SPvernment budgetary process and the attendant issues of price determination, wesith distribution, employment, unemployment, poverty, inflation, economic growth and the likes, In order to organize the ever expanding scope of economies, the areas of studies in economics have been separated into the following branches: Microeconomics: Macroeconomics may be defined as that branch of economic analysis which studies behaviour of Rot one particular unit, but ofall the units combined together. Macroeconomics seeks to focus on ‘eal world problems ofthe economy atthe aggregate level by studying the determination and the relationship between aggregate economic variables such as consumption, investment, general Price level, gross domestic product, inflation, employment ete, The publication of Keynes? General Theory of Employment, Interest and Money, in 1936, gave a strong push to the growth and development of modem macroeconomics, International Economicse of central, state and local governments for th .d expenditure. In public expenditure, Public finance studies the income and expenditure i collective satisfaction of wants and the principles which govern #ncom® snodern times, public finance includes four major divisions public revenue, public debt and financial administration. Development economics i i . These After the Second World War, many countries got freedom from their eae nae . newly independent economies required different treatment for growth and developm parly led to the branch of economies called development economics Environmental Economics “soviousies fo womeetues wiih ive analysis of dhe impact OF the economy Ob the cnvironment, the significance of the environment to the economy and appropriate way of regulating economic activity so that balance is achieved among environmental, economic and other social objectives. Health economics |A new realisation has emerged from human development for economic growth. Therefore, tranches like health economics are gaining momentum. Similarly, educational economics is also coming up. Urban and rural economics ‘The role of location is quite important for economic attainments. There is also much debate on urban-rural divide. Therefore, economists have realised that there should be specific focus on. urban areas and rural areas. Hence, branches like urban economics and rural economics have become distinct subject areas in economics. Similarly, regional economics is also being emphasised to meet the challenges of geographical inequalities. Industrial Economics Industrial Economics is another branch of economics which studies the operation and performance of imperfectly competitive markets and the behaviour of firms in these markets. It is the field of economics concerned with markets and firms where the applicability and explanatory power of the theory of perfect competition is questionable due to insufficient ‘competition. There are man ; : Seine Ly other branches of economics that form the scope of economics. These include ‘conomics, monetary economics, energy economies, transport economics, spacei omic planning, economies, labour economics, agricultural economics, gender economics, economic p economies of infrastructure, and so on. On the Scientific Nature of Economics A substantial difference of opinion existed on whether economics is a science or arts. However, as of today, economics is regarded as a science because the characteristics of science are i applicable to economies, We note that a science is a systematised (organised) body of knowledg that can be ascertained through observation and experimentation. The body of knowledge so ascertained in a discipline consists of generalizations principles, theories or laws which explains the relationship between cause and effect in any event covered by the scope of the discipline, For any discipline to qualify for being a science, it must possess the following characteristics. Each ofthece charactert o dloowssed below with ovideiice ihai cuuuuiics pussesses avi (a) Systematised body of knowledge: For a discipline to be a science, the pieces of information that convey understanding about the discipline must be organised in a way that guides leaming. Economies is a science because it has a systematised body of Knowledge. It is a discipline organised into different branches in which economic facts are studied and analysed. Some of these branches were mentioned above, Furthermore, cursory look at any textbook of economics will show how the contents page is arranged ina sequential order to aid learning, (b) Peculiar laws or theory: A scientific discipline must have its own laws or theories which explain the relationship between cause and effect within the discipline. Economics is a science because it has its owm laws or theoties such as the theory of Consumer behaviour, production theory, laws of production, and laws of demand and supply ete. which describe cause and effect relationship between various variables,regarded as a science, because by and large, it laws or theories are able to predict future areas of life. course of event in the econo (©) Self-correetive: A scientific discipline has the feature of extending the frontiers of knowledge. This is done through continuous improvement in the stock of knowledge in the light of new facts and observations. It should be noted that economics is a scientific field of study because of its self-corrective nature. Economics theories and principles are ‘updated through research findings in the various branches of economics like international economics, public sector economics, industrial economics, environmental economics etc. (O Universal Validity:.The laws and theories of scientific field of study nossess the characteristics that they are universally applicable on account of their being valid irrespective of the place of application. For instance, the law of gravitational pull is applicable anywhere on earth. In this regard, economics is a science because the laws or theories of human economic behaviour possess universal validity. For example, the law of diminishing returns, the law of consumption behaviour expressed in the form of diminishing marginal utility, the laws of demand and supply are all valid irrespective of their place of application. Positive and Normative Economics Ithas been shown that economics is a social science. Now the question arises whether it is a positive science or a normative science. A positive science is oriented towards positive analysis, which is concemed with descriptive factual statements about the world. Positive analysis uses scientific principles to arrive at conclusions that are objective and testable, On the other hand a normative science is concerned with prescriptive, value-laden statements about the world around us. Normative analysis involves making recommendations about what should be done based on a particular viewpoint that may be informed by cultural, religious, political, racial, ethnic, social or other considerations. Positive economics describes the facts of the economy by analysing and explaining what is. In positive economics, the economist deals with the way the economy works without any coloration of moral or ethical questions. In this way positive economics is neutral between ends. This is to say that, in positive economic analyses, the economist is not concerned with the desirability or otherwise of the ends but with the problem of scarce resources in relation to the ends expressed. For instance, positive economics is not concerned with whether it is good or bad to produce more beer than bread in a state of the federation, but it is concerned with the problem of explaining the choice making process that allocates society's scarce resources to the production of more beer rather than bread. Such explanation on the nature of economic activities is a useful decision making tool. For example, if in the course of the explanation, economic agents see that it is more profitable to produce beer rather than bread, the information provided can be used in takingvital decisions. Business firm managers may take investment decisions that favour the production of the more profitable beer to seize opportunity to make more profits. Government may take decision to levy more tax on beer- than on bread- producing firms in order to raise more revenue. More households may express desire to work in brewery firms than in bread baking firms in expectation of higher incomes. In all these, positive economic analysis has not and will not pass any judgments on the correctness or otherwise of beer production over bread. Definition: Positive economics isthe study of the causal relationships that exist in the economy, without passing any value judgements on the desirability or otherwise of such relationships. In positive economics study, the economist is occupied with analysing positive statements and providing objective ex; ted ; ‘statements are said to be empirically verifiable. In economics, examples of positive statements include the following (in bold prints) together with the reason for classifying each as positive statements. a) Minimum wage legislation causes unemployment. This can be confirmed or refuted by examining evidence through analysing data on changes in minimum wages and changes in unemployment rates over time. ; b) A fall in incomes will lead to a rise in demand for canned supermarket foods. This statement ean be verified by appeal to evidence when the relationship between data on incomes and quantity demanded of canned supermarket foods over time are examined. The analysis will establish whether the relationship is positive or negative. If the relationship is found to be positive, then the statement is refuted, if negative it is confirmed. No more, no less. ©) If the government increases the tax on beer, the profits of breweries will fall. Again this statement is empirically verifiable. All that the economist needs to do is to examine the relationship between different tax revenues and brewing firms’ profits over time. The ‘true nature of the hypothesised relationship will emerge from the analysis of this data, and the statement will either be accepted or rejected. 4) Higher interest rates wil reduce house prices. By collecting and analysing data on tates of interest andthe various prices at which houses are sold over a period of time, say from year 2000 to year 2010, the truth or otherwise of this statement can be determined ©) A rise in average temperatures will increase the demand for sun sereen products, The nature ofthe relationship between average temperatures and sun sereen product such 2s umbrella can be verified by collecting data from meteorological survey of average ‘Rmperatures and market survey of quantities of umbrella purchased, Having obtained this data over time, the economist can use appropriate techniques of data analysis tovital decisions. Business firm managers may take investment decisions that favour the i production of the more profitable beer to seize opportunity to make more profits. oie may take decision to levy more tax on beer- than on bread- producing firms in order to rai 5 eey more revenue, More households may express desire to work in brewery firms than in bre ive economic analysis has not baking firms in expectation of higher incomes. In all these, posi n ey and will not pass any judgments on the correctness or otherwise of beer production over bread. Definition: Positive economics is the study of the causal relationships that exist in the economy, without passing any value judgements on the desirability or otherwise of such relationships. : i peru =a In positive economics study, the economist is occupied with analysing positive statements zy Providing objective explanations on them, Positive economic statements are those that can be tested ei available evidence. ! statements are said to be empirically verifiable. In economics, examples of positive statements include the following (in bold prints) together with the reason for classifying each as positive lend statements, 4) Minimum wage legislation causes unemployment. This can be confirmed or refuted by examining evidence through analysing data on changes in minimum wages and changes in unemployment rates over time. A fall in incomes will lead to a rise in demand for canned supermarket foods. This statement can be verified by appeal to evidence when the relationship between data on incomes and quantity demanded of canned supermarket foods over time are examined. The analysis will establish whether the relationship is positive or negative. If the relationship is found to be positive, then the statement is refuted, if negative it is confirmed. No more, no less. » 6) If the government increases the tax on beer, the profits of breweries will fall, Again this statement is empirically verifiable, All that the economist needs to do is to examine the relationship between different tax revenues and brewing firms’ profits over time. The true nature of the hypothesised relationship will emerge from the analysis of this data, and the statement will either be accepted or rejected, 4) Higher interest rates will reduce house prices, By collecting and analysing data ondetermine whether or not these two variables are positively or negatively related. Hence the statement can be refuted or accepted. Given the above discussions, the features of positive economics can be summarised below: Features of Positive Economics It expresses what is, not what ought or should be 2. It is based on facts and not on fairness. 3. It deals with actual situations and not on perceptions. 4. It can be verified with actual data, hence it is scientific. 5. It does not include value judgments in its analyses and conclusions. 6. It deals with how an economic problem is solved. not how it should be solved. 7. It is descriptive and not prescriptive i.e. does not recommend. 8. It is objective and not subjective, Normative economics attempts to prescribe how the economy should work based on the opinion of the economist making the prescription. In this way we say that normative economics involves value judgement which may be informed by religious beliefs, cultural orientation, political inclination, race nationalism or any other personal or group based criteria .The underlying factors in normative economics are ethical standards and norms of fairness. This is in contrast to the underlying factors in positive which is fact . Because fairness underly normative economics, it is impossible to subject normative statements to empirical investigation. Thus the explanations provided in normative economics are entirely subjective. It should be noted however that normative statements may involve consideration of data however, the analysis and explanations are not based on the data alone, but on fairness , interpreted as conceptions of people about what is good or bad . Now value judgements of different individuals differ, therefore in normative economics there are no right or wrong answers. Consider this statement: “The government should raise minimum wage” . The first thing to note is that this statement implicitly contains numerical data about current value of minimum wage. However the person evaluating the current minimum wage is passing a subjective judgement on the ability of earners of the current minimum wage to live well. This living well however differs from person to person and from place to place. So the statement: the oe should raise minimum wage is a normative statement. Normative statement can also a in a) such as : should all Nigerian have access to the National Health insur. i ance Scheme? Should students be penalised for violating copyright law by photocopyii textbooks? In all these , there are no wri ee ‘ ‘ong or right answers becaus. i cannot be subjected to scientiic(empirical) testing asdetermine whether or not these two variables are positively or negatively related. Hence the statement can be refuted or accepted. Given the above discussions, the features of positive economies can be summarised below: Features of Positive Economics 1 It expresses what is, not what ought or should be 2. It is based on facts and not on fairness. 3. It deals with actual situations and not on perceptions 4. It can be verified with actual data, hence it is scientific. ? 5, It does not include value judgments in its analyses and conclusions. 6. It deals with how an economic problem is solved. not how it should be solved. 7. Itis descriptive and not prescriptive i.e. does not recommend. 8. It is objective and not subjective. Normative economies attempts to prescribe how the economy should work based on the opinion of the economist making the preseription. In this way we say that normative economics involves value judgement which may be informed by religious beliefs, cultural orientation, political inclination, race nationalism or any other personal or group based criteria .The underlying factors in normative economics are ethical standards and norms of faimness.This is in contrast to the underlying factors in positive which is fact . Because faimess underly normative economics, it is impossible to subject normative statements to empirical investigation. Thus the explanations provided in normative economics are entirely subjective. It should be noted however that normative statements may involve consideration of data however, the analysis and explanations are not based on the data alone, but on fairness , interpreted as conceptions of people about what is good or bad . Now value judgements of different individuals differ, therefore in normative economics there are no right or wrong answers. Consider this statement: “The government should raise minimum wage” . ‘The first thing to note is that this statement implicitly contains numerical data about current value of minimum wage. However the person evaluating the current minimum wage is passing a subjective judgement on the ability of eamers of the current minimum wage to live well. This living well however differs from person to person and from place to place. So the statement: the government should raise minimum wage is a normative statement, Normative statement can also come in form of questions such as : should all Nigerian have access to the National Health Insurance Scheme? Should students be penalised for violating copyright law by photocopying textbooks? In all these there are no wrong or right answers because each normative statement cannot be subjected to scientific(empirical) testing,Definition: Normative economics is the study of what economic relationships ought to be. In normative economics, the economist is pre-occupied with the evaluation of normative statements by providing subjective explanations and conclusions. In economics examples of normative statements include the following: a) Unemployment is the most serious economic problem in Nigeria ‘Though the data on current unemployment rate may be staggering, this statement is normative because itis a result of the personal feeling or experience of the person evaluating Nigeria’s economic problems. To some other persons, the most serious economic problem in Nigeria might be corruption or too much of government intervention in the economy or inflation ot any other thing This statement is normative because it emanates from é aa persuasion. Structuralist economist who believe in government intervention will thi otherwise. Also, economists who live in countries with serious market failures in resource 5 economists of neo-liberal allocation may disagree ©) The retirement age of all workers in Nigeria should be 70 years and not that of university lecturers alone, : This statement is normative as the opinion expressed here raises the question of fairness between two groups of workers in Nigeria -the University lecturers versus other workers. The resolution of this statement cannot be scientifically conducted becalise the analysis will be coloured by the personal or group opinion about the desirability or otherwise of raising the retirement age of all workers to 70. 4) Minimum wage is good for poverty reduction because about 90 of countries in the world practise, Although this statement contains actual data that is nevertheless is a narrative statement. This is because it centred on the whether minimum wage legislation is good or bad. Deciding what is good or bad wage policy is not merely a matter of science, it also involves our views on ethics, religion and economic and political philosophies. ©) The government is right to introduce a ban on the smoking in public places. Again this statement is narrative because its evaluation examines the question of fairness, The answer depends on the group doing the evaluation, For smokers they may feel their personal freedom are curtailed. To some economist, they may feel the enforcement cost can be used to provide amenities. To non-smokers the government actions is right as it frees them from forced consumption of cigarettes, By and large, the evaluation is subjective, The distinction between positive and normative economies can be thought of as emanating from the functions of economic theory. Economic theories have two main functions. One is to explain the nature of economic events. A better understanding of how changes in one economic Variable affects another, equips us in dealing with theenvironments in which we live, Explaining the fact of the economy belongs to the realm of positive economics, The other function of economic theory is to predict what will what is likely to happen to the key economic variables which impact on our lives, we will be prepared to take necessary actions if the predicted consequences are not desirable. From the above illustrations on normative economics, we can deduce that statements of economic policy makers in government are normative economics in nature. A policy maker however, cannot just issue economic Policies without proper understanding of the basic causal relationship of economic Variables involved. Policy makers should be aware that economic prescriptions should be Tooted on a sound positive economic analysis. Economic policy making- a deliberate intervention in economic activity with the intent of altering the course it will take- is therefore an enormous responsibility. Positive Statements happen to the economy. If we can predict Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence. Positive economics deals with objective explanation and the testing and rejection of theories. For example: A fallin incomes will lead to a rise in demand for canned supermarket foods Ifthe government raises the tax on beer, this will lead to a fall in profits of the brewers. The rising price of crude oil on world markets will lead to an increase in cycling to work A reduction in income tax will improve the incentives of the unemployed to find work. A rise in average temperatures will increase the demand for sun screen products. Higher interest rates will reduce house prices Cut-price alcohol has increased the demand for alcohol among teenagers A car scrappage scheme will lead to fallin the price of second hand cars A value judgement is a subjective statement of opinion rather than a fact that can be tested by looking at the available evidence Normative Statements Normative statements are subjective statements rather than objective statements — Le, they carry value judgments. For example: Pollution is the most serious economic problem Unemployment is more harmful than inflation The congestion charge for drivers of it petrol-guzzling cars should be 25,0 i The government should increase the minimum wa ipredaFocusing on the evidence is called adopting an empirical app roach — evidence-based work is becoming more and more important in shaping different government policies, Economie Methodologies The methodology of a discipline refers to the basic-approach (es) commonly used in a discipline in the creation of knowledge. It is a guide for practitioners abo ut how to go about answering @ question or solving a problem. Over a period of time economic science has gained maturity to develop its methodology which is proving now to be quite efficient and such ‘methodologies can k ‘ i fone can he be used for efficient analysis of the econamic. relationships nd predictions © 5 lo with i Is sufficient accuracy that generate a sense of confidence and faith. There are two broad method: used in the economic sciences. 1. The deductive method 2. The inductive method The deductive method regarding human behaviour are taken to be true and then with the help of logi ‘This method involves going from general to particular. Certain hypotheses or postulates | reasoning and ccecnination, we ty to figure out the cause and effect relationship between the factors under consideration. The following steps are involved in the deductive method. 1 Firstly, a problem needs to be identified and then it should be properly specified for the study. 11 The assumptions required inthe study should be clear. Appropriate assumptions are crucial in economic analysis. IIL After specifying the assumptions, hypotheses should be clearly framed. The hypothesis formulation requires likely relationship among the different economic variables. IV. In the last phase, hypotheses should be tested through different economies and econometrics. it tools like mathematical YV. Based on the above analysis proper inference needs to be derived for specific economic decision making. 1. The inductive methodAlthough deductive method has strong points of merit to depend upon, this methodology seems to suffer from certain weaknesses. Therefore, economists belonging to the historical school and many other economists have favoured the inductive or empirical method. The method of induction involves going from particular to general. Here the appeal is to facts, rather than reasoning and an attempt is made to rrive at conclusions from the known facts of actual life. The inductive method required the following steps: I. The first step, as under the deductive method, is selecting and specifying the problem that is to be studied Il, The second step involves collection of data pertaining to the problem selected for study. Hi, The siaue of wuliectivn is foliowed by ciassification and then anaiysis of the data by appropriate statistical techniques. TV. The fourth stage is that of ‘inference’, i.e. drawing conclusions from the statistical analysis conducted. The conclusions are presented in the form of economic generalisation.