Hi guys, welcome back to yet another post on your favorite blog “ICCBizNews".
Today we shall be learning about the concept of positive and normative economics.
All right, so let’s begin.
Shall we??
Positive economics, on the one hand, focuses on the study of how people should behave in any given situation to maximize happiness for all involved and concerned. However, the concept of Normative economics, on the other hand, loves to examines not only how people behave in X no. of situations, but also tries to figure out why they act that way they do in the first place.
The Importance of Normative Economics:
In addition to being an academic discipline, normative economics has practical applications as well. It helps us understand why we do what we do, and what choices we should make to arrive at a better outcome for all involved and concerned in the near future.
As a social science, the aim of the study of the domain of economics is to use the principles and methods of science to explain economic behavior between all particpants (I.E. Purchasers) & players (I.E. Producers). This activity involves making positive statements about XYZ stuff concerning the economic world.
Positive statements are those that once made can be verified and are factual, such as:
“House prices have plummeted by 15% over the last year.”
In contrast, normative statements are foundationally based around opinions & value judgments. These statements are the ones suggesting that something “ought to” happen, or that something is “unfair”, are normative in the context of their nature because they are/consist of the matters pertaining to a certain type of opinion.
For eg: “The latest decline in prices regarding the housing market is unfair to the rich and their assets”.
The factual correctness of this statement cannot be tested as an experiment because it doesn't seem to be based on anything "Testable".
However, if there appears to be an agreed definition of fairness within the above-mentioned statement concerning the decline of house prices and its unfairness to the richer sections of the society, etc, plus owing to the fact that it can be measured, then it might be possible to test the effect of the change in house prices in comparison to the degree of fairness experienced by the elite and ultra wealthy group of individuals of a certain identifiable group of people within any given society known as the richer and richest sections of that society, then it can be assumed and some what confirmed that this statement is normative, impossible to verify, and based on opinions rather than data and stats backed "facts".
The Ceteris Paribus Rule:
As all of us here might be aware of the fact that the field of economics is like a social science, but unlike the other physical sciences, it is very difficult to engage and execute a controlled experimentation to perceive and demonstrate how different variables are connected to each other in any given situation and market scenario.
Hence, in the real world, economic variables such as price and income, tend to float around and fluctuate based on the market forces of demand and supply. Now this phenomenon (concerning economic variables such as price and income) as described above creates a problem in demonstrating the relationship between these variables. For eg: a fall in price could most likely lead/indicate to a rise in consumer demand assuming nothing else changes.
Of course, for independent reasons, income could also decline while demand for XYZ products and services might not rise for certain reasons like inflation, decrease in the per capita income and purchasing power of various individuals in a society, etc. The fall in price could have been counterbalanced by a fall in income of XYZ scale and magnitude.
So what??
Here's the answer.
The ceteris paribus rule of "assuming that all other things remain the same", is used whenever one is required to demonstrate the link between various economic variables such as the trade off between risk & reward, demand and supply, cost price and profit margins in comparison to the level of inflation existing in that time period, etc.
This helps people build budgets and accordingly make future purchase decisons based on their needs, interests, desires, wishes, wants & requirements, which in turn keeps the economic system of a country working to create economic and materialistic well-being for one and all.
Awesome, right??
Alright, that's it for this post.
We shall meet again in another one.
Till then, let's talk about this post in the comments section below and clarify any doubts you may have pertaining to the above-mentioned topic.
Catch you later.
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