Economists describe the economic world through two different lenses:
- Positive economics: descriptively.
- Normative economics: subjectively.
This section will explain both ways of thinking.
The role of positive economics
Positive economics
Way of thinking in economics that focuses on describing, explaining, and predicting economic events.
Positive economics aims to increase our understanding of the economic world. Positive economics:
- Relies on positive statements, which address what is, was, or will be.
- These statements are grounded in hypotheses, theories, and models to analyze economic activities, and can be:
- Descriptive: provide factual descriptions of economic conditions.
- Explanatory: explain events and illustrate cause-and-effect relationships.
- Predictive: predict future economic trends.
- Descriptive: "the inflation rate in the Thailand was 3.2% last year."
- Explanatory: "a higher price for potatoes results in fewer potatoes being purchased."
- Predictive: "interest rates will increase next quarter" predict future economic trends.
Positive economics aims to increase our understanding of the world through:
- The use of logic.
- The use of hypotheses, models, theories.
- The ceteris paribus assumption.
- Empirical evidence.
- Refutation.
The use of logic
Positive economics involves analyzing and interpreting the economic world to describe, explain, and predict economic events. This process relies on logic.
Logic is a systematic method of reasoning where:
- Conclusions are drawn from a sequence of true statements.
- Each statement in the chain is valid if the preceding statements are true.
- If prices rise, fewer consumers are willing and able to buy a good or service (since it is more expensive).
- The prices of tourism have risen.
- Therefore tourism will fall this year.
Why does positive economics make use of logic?
- Economists use logic to explain why events occur and to make future predictions.
- Logical thinking is crucial for developing hypotheses and theories about economic behaviour.
The use of hypotheses, models, and theories
To increase our understanding of the economic world and develop prediction, economist make use of hypotheses, models, and theories:
- Economists often start with a hypothesis.
- A hypothesis is a testable "supposition" about an economic relationship.
- The hypothesis is examined using data.
- If supported by evidence, the hypothesis may evolve into a model.
- A model is a simplified representation of reality designed to explain or predict outcomes.
- Over time, consistently validated models may contribute to broader theories, such as the theory of supply and demand.
