Economic Methodology

Yashodhara Bhetuwal
RBS
Economics as a social science
• Economics is a social science concerned with the production,
distribution, and consumption of goods and services. It studies how
individuals, businesses, governments, and nations make choices
about how to allocate resources.
• Economics focuses on the actions of human beings, based on
assumptions that humans act with rational behavior, seeking the
most optimal level of benefit or utility.
• Since there are many possible applications of human labour and
many different ways to acquire resources, it is the task of economics
to determine which methods yield the best results.
Economics can generally be broken down into
microeconomics and macroeconomics.
• Microeconomics
• It focuses on how individual consumers and firms make decisions.
These individual decision making units can be a single person, a
household, a business/organization, or a government agency.
• Microeconomics tries to explain how they respond to changes in price
and why they demand certain quantity at particular price levels.
• Microeconomics tries to explain how and why different goods are
valued differently, how individuals make financial decisions, and how
individuals best trade, coordinate, and cooperate with one another.
• It also includes how labor is divided and allocated; how business firms
are organized and function and how people approach uncertainty,
and risk.
Macro Economics
• Macroeconomics studies an overall economy on both a national and
international level, using highly aggregated economic data and
variables to model the economy.
• Its focus can include a distinct geographical region, a country, a
continent, or even the whole world.
• Its primary areas of study are current economic cycles and broad
economic growth and development.
• Topics of macro economics include foreign trade, government fiscal
and monetary policy, unemployment rates, the level of inflation and
interest rates, the growth of total production output as reflected by
changes in the Gross Domestic Product (GDP), and business cycles
that result in expansions, booms, recessions, and depressions.
Positive and Normative statement
Positive and normative statement
• His salary is Rs.20000 per month.

• His salary should be Rs.20000 per month.

Positive statements
Positive statements describe and explain how things in
the economy actually work. They deal with what is, what
was and what will be. They are used in several ways:

1. They may describe something (e.g. the unemployment

rate is 5%, the industrial output grew by 3%)

2. They may be statement in a theory (e.g. an increase in

price leads to a decrease in quantity demanded)

3. They may be about a cause and effect relationship (if

the government increases spending, unemployment will
fall)
cont.….
• Positive statements may be true or false:- by looking
the facts we can find whether the statement is true or
false.

• There is no value judgment in the positive statement.

• Value judgment refers to the decision about whether

something is good or bad or important on personal
opinion rather than facts.
Normative statements
Normative statements deal with how things ought to work. 'Ought to'
is used to say what you advice or recommend. These are the
subjective statements about what should happen. They are the
matters of opinion. Examples include:

• Health care should be available free of charge

• The unemployment rate should be lower

• Extreme poverty should be eradicated.

cont….
• Thus, normative statements are based on value judgments. They
cannot be true or false. But, we may agree or disagree with them,
depending on our beliefs.

• Normative statements are easy to notice because they contain value

judgment words like ought to, should, too much/too little,
just/unjust, fair/unfair etc.
Ceteris paribus
It is a Latin terminology that means "all other things being equal".
Another way of expressing it is that "all other things are assumed to
be constant or unchanged".

• Economists use it when explaining the relationship between two or

more variables in the economic theories
Cont.
• E.g. according to the law of demand, there is an inverse relationship
between price of a commodity and its quantity demanded over a
particular period of time, ceteris paribus.

• Here, ceteris paribus, assumption is related to all other variables than

price that can influence demand, like income of consumers, fashion,
number of consumers, advertisement.
The time dimension
We live in a world of change. Change is all around us in our lives, our work
and in the ways in which economies function. In order to take change into
account, it is often necessary to specify the time dimension. This can be
done very effectively in terms of the factors of production.
• The short run is a time period in which it is possible to change only some
inputs. Typically it is when labour, a variable factor of production, can be
increased or decreased to change output. So, with all other factors of
production remaining the same (ceteris paribus), a firm taking on more
workers may be able to increase its output.
• In the long run, it is possible for all factors of production or resources to
change. So, in the long run, a firm may improve the quality and quantity of
its capital by building a new factory to increase its output.
The time dimension
• This will usually allow it to be more efficient since the firm has had
time to evaluate how best this can be done successfully and
efficiently.
• The very long run is where not only are all factors of production
variable, but all other key inputs are also variable. These key inputs
can include technology, government regulations and social
considerations.
• It should be clear that it is not possible to put an exact timescale on
any of these time periods. Just what they are likely to be will depend
on particular circumstances.