NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

ECONOMICS

First Trimester

TOPIC: - POSITIVE AND NORMATIVE

ECONOMICS

Submitted by: - Submitted to: -

Kapil Katare Prof. Rajesh Kumar Gautam

2018BALLB82

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 TABLE OF CONTENT

………………………………………………………………………………………………......

ACKNOWLEDGEMENT………………………………………………………….……..3

INTRODUCTION………………………………………………………………….……..4

WHAT IS ECONOMICS?..................................................................................................5

MACRO ECONOMICS…………………………………………………………….…….7

MICRO ECONOMICS……………………………………………………………………8

POSITIVE ECONOMICS………………………………………………………………...9

NORMATIVE ECONOMICS……………………………………………………..……..10

DIFFERENCE BETWEEN POSITIVE AND NORMATIVE ECONOMICS…….…….11

EXAMPLES OF POSITIVE AND NORMATIVE ECONOMICS………………….…..12

CONCLUSION……………………………………………………………………….…..13

BIBLIOGRAPHY …………………………………………….………………………….14

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 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my Teacher Prof. Rajesh Kumar
Gautam who has been a great mentor and has been a constant support throughout, as well as
our Director Prof. (Dr.) V. Vijayakumar who gave me the golden opportunity to do this
wonderful project on the topic Positive and Normative Economics, which also helped me in
doing a lot of research and I came to know about so many new things I am really thankful to
them

I am also thankful to the library administration for the provision of necessary books and texts
needed for the completion of this project.

Lastly I would also like to thank my parents and friends who helped me a lot in finalizing this
project within the limited time frame.

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 INTRODUCTION

There are different views regarding the scope and nature of economics. According to Prof.
Pigou, “Economics is a positive science of what is and what tends to be, it is not a normative
science of what ought to be.” Though this type of view narrows the scope of economics too
much, sometimes it is not possible to discuss ‘what is’ without the knowledge of ‘what ought
to be’. According to Prof. Marshall, the scope of economics includes the study of physical
facts and human activities relating to production, consumption, exchange and distribution of
wealth. The study is concerned primarily with those activities which can be measured in
terms of money. This part of economics can be called a positive science. Further, it includes a
normative part, i.e., a discussion of how existing facts may be altered for the betterment of
mankind.

Economists find out the ways by which the efficiency in production can be increased, they
investigate the causes of low productivity, depression, unemployment and poverty. Again, the
economists suggest the steps which can be taken for the removal of those these evils from the
economic system.

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 WHAT IS ECONOMICS?

The word Economics come from the two Greek terms – “oikos and nemo” meaning
“household management”, the management of the household being one of the most familiar
fields for the practice of economy. Economics saw the light of the day when economists
developed out the necessity to certain aspects of man’s social and industrial environment.

At present, there are number of definitions of economics, let us study some of them: -

According to Adam Smith, “Economics is a branch of the science of a statesman or legislator

with the twofold objectives of providing a plentiful revenue or subsistence for the people and
to supply the state or commonwealth with a revenue for the public services.”

According to Alfred Marshall, “Political economy, or economics is a 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.”

According to Lionel Robbins, “Economics as a science which studies human behaviour as a

relationship between ends and scarce means which have alternative uses.”

According to Samuelson Paul, “Economics is the study of how man and society choose, with
or without the use of money to, to employ scarce productive resources which could have
alternative uses, to produce various commodities over time, and distribute them for
consumption now and in the future among various people and groups of society.”

In its most simple and concise definition, economics is the study of how society uses its
limited resources. Economics is a social science that deals with the production, distribution,
and consumption of goods and services. Economics focuses heavily on the four factors of
production, which are land, labor, capital, and enterprise. These are the four ingredients that
make up economic activity in our world today and can each be studied individually.

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Though it’s a vast concept and various economists have given different complicated
definitions, the best way to describe economics is studying about production, distribution and
consumption of goods and services. It mainly deals with the most common problem in this
world, how to satisfy our unlimited wants with the limited resources we have by our side.

So, it also relates to how people earn and spend their income.

Economics is split into the following two broad categories of study: -

 Macroeconomics - The branch of economics that studies the overall working of a

national economy. It is more focused on the big picture and analysing things such as
growth, inflation, interest rates, unemployment, and taxes. When you hear the Federal
Reserve is raising interest rates or that the national unemployment rate is 4.8%, you
are hearing about macroeconomic topics.

 Microeconomics - The branch of economics that studies how households and

businesses reach decisions about purchasing, savings, setting prices, competition in
business, etc. It focuses at the individual level, while macroeconomics looks at the
decisions that affect entire countries and society as a whole.

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 MACRO ECONOMICS

Macroeconomics is a branch of the economics that studies how the aggregate economy
behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined
such as inflation, price levels, rate of growth, national income, gross domestic product (GDP)
and changes in unemployment.

Macroeconomics is a rather broad field, but two specific areas of this discipline. One area
involves the process of understanding the causation and consequences of short-term
fluctuations in national income, also known as the business cycle. The other area involves the
process by which macroeconomics attempts to understand the factors that determine long-
term economic growth, or increases in the national income.

Those working in the field of macroeconomics study aggregated indicators such as

unemployment rates, GDP and price indices, and then analyse how different sectors of the
economy relate to one another to understand how the economy functions.

Macroeconomists develop models explaining relationships between a variety of factors such

as consumption, inflation, savings, investments, international trade and finance, national
income and output. Such macroeconomic models, and what the models forecast, are used by
government entities to aid in the construction and evaluation of economic policy.

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 MICRO ECONOMICS

Microeconomics is the social science that studies the implications of individual human
action, specifically about how those decisions affect the utilization and distribution of scarce
resources. Microeconomics shows how and why different goods have different values, how
individuals make more efficient or more productive decisions, and how individuals’ best
coordinate and cooperate with one another. Generally speaking, microeconomics is
considered a more complete, advanced and settled science than macroeconomics.

Microeconomics is the study of economic tendencies, or what is likely to happen when

individuals make certain choices or when the factors of production change. Individual actors
are often broken down into microeconomic subgroups, such as buyers, sellers and business
owners. These actors interact with the supply and demand for resources, using money and
interest rates as a pricing mechanism for coordination.

As a purely normative science, microeconomics does not try to explain what should happen
in a market. Instead, microeconomics only explains what to expect if certain conditions
change. If a manufacturer raises the prices of cars, microeconomics says consumers will tend
to buy fewer than before. If a major copper mine collapses in South America, the price of
copper will tend to increase, because supply is restricted.

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 POSITIVE ECONOMICS

Positive economics is descriptive economics because in doing positive economics, our goal is
to describe, as accurately as possible, what is. When economists describe the economy, make
predictions about how the economy will change, or explain the effects of different
alternatives, they are involved in positive economics.

Positive economics is concerned with understanding and explaining how decision makes in
an economy system actually solve the problems i.e., its aim is to understand and explain the
actual behaviour of economic agents (such as household, firms, and government, national
economies).

The statement, "government-provided healthcare increases public expenditures" is a positive

economic statement, because it can be proved or disproved by examining healthcare spending
data in countries where the government provides healthcare.

Positive statements provided by positive economics are objective. These statements can be
defined and tested or rejected and amended depending on the evidence available. Some
examples of positive statements include:

i. Lowering the price of cigarettes has increased the demand for cigarettes among
teenage consumers.
ii. The rise of crude oil prices lessens the use of cars and increases the demand for
bicycles.
iii. Brewer profits will drop if the government taxes alcohol.

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 NORMATIVE ECONOMICS

Normative economics is a perspective on economics that reflects normative, or ideologically

prescriptive, judgments toward economic development, investment projects, statements and
scenarios.

Normative economics aims to determine people's desirability or the lack thereof to various
economic programs, situations and conditions by asking what should happen or what ought to
be. Therefore, normative statements typically present an opinion-based analysis in terms of
what is thought to be desirable - for example, stating that we should strive for economic
growth of 8% or inflation of 0% could be seen as normative.

All of us have opinions and make value judgments. Hopefully these judgments are based on
facts. Normative statements are subjective. They involve setting goals based on value
judgments. "The minimum wage should be increased to 100 Rs. per hour." is a normative
statement. It is clearly an opinion. Normative economics looks more at how an economy
ought to be in an ideal world and employs value judgments. Economists sometimes make
value judgments, or decisions based partially on their personal value system. In contrast,
positive economics are objective, cause and effect statements which do not include a value
judgment. A distinction is that positive statements can be tested, where normative statements
cannot be tested because they are subjective. For example, "The minimum wage will lead to
higher unemployment among low skilled workers." is a positive statement. Positive
statements may be false, but they can be tested.

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 DIFFERENCE BETWEEN POSITIVE AND NORMATIVE
ECONOMICS

Statement 1: There is connection between smoking cigarettes and physical health.

Statement 2: The government should make cigarette smoking illegal.

Statement 1: The reason for the rise in the fuel price is due to production problems.
Statement 2: The price of fuel should be lowered.

Statement 1: Unemployment rate is 4.8 percent.

Statement 2: Unemployment rate should be less than 1 percent.

If we see the difference between the statements 1 and 2 given above. One is a description of
what is i.e. the unemployment rate is 4.8%, while the other expresses a value judgment i.e.
the unemployment rate should be less than 1%. The issue that is being raised here, and the
one that we are constantly confronted with, is the importance of differentiating between an
analysis of what is and an analysis of what we think should or should not be. If we want to
conduct a valid economic analysis, then we must be willing and able to separate our views
about what does happen in the economy from our views about what we would like to have
happen in the economy. We must be willing and able to separate what the facts tell us about
the questions that we want answered, from what our feelings tell us about how we want the
answers to turn out. Quite simply, we need to be aware of the difference between a statement
of fact and a value judgment. Economists refer to an analysis of fact as positive economics
and an analysis based on value judgments as normative economics.

Positive economics is objective and fact based, while normative economics is subjective and
value based. Positive economic statements do not have to be correct, but they must be able to
be tested and proved or disproved. Normative economic statements are opinion based, so they
cannot be proved or disproved. While this distinction seems simple, it is not always easy to
differentiate between the positive and the normative. Many widely-accepted statements that
people hold as fact are actually value based.

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EXAMPLES OF POSITIVE AND NORMATIVE ECONOMICS

1. The law of demand – “If other factors remain constant, if price rises, demand
declines; and if price decreases, demand inclines.”
It is a Positive Economics Statement. As it says that demand will rise or fall if prices
fall or rise in inverse proportion; when other factors remain constant. It is a
descriptive statement which can be tested or verified. And it can be true or false.
2. The government should reduce the number of minority members in the military and
increase the number of whites.
It is a Normative Economics Statement. As it says government should reduce the
number of minority members. It does not state a fact which can be verified it is just an
opinion.
3. Increasing the interest rate will encourage people to save.
It is a positive Economics Statement. As it does not contain value judgments, and its
accuracy can be tested.
4. The government ought to supply a medical insurance scheme for everyone free of
charge.
It is a Normative Economics Statement. As it says government ought to supply so it is
a judgement rather than a fact.
5. A cut in wages will reduce the number of people who are willing to work.
It is a Positive Economics Statement. As it states which can be verified whether
wrong or right.
6. Hong Kong government should increase its budget allocation to reduce the number of
illegal immigrants from China.
It is a Normative Economics Statement. As it says what government should do, it is a
judgement or an opinion not a fact based statement which can be tested or verified.

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 CONCLUSION

Normative economics may be useful in establishing and generating new ideas from
different perspectives, but it cannot be the only basis for making decisions on
important economic issues, as it does not take an objective angle that focuses on facts
and cause-and-effects.
Economic statements coming from the positive economics angle can be broken down
into determinable and observable facts that can be examined and tested. Because of
this characteristic, economists and analysts often practice their professions under the
positive economic angle. Positive economics, being the measurable perspective, helps
policymakers and other government and business authorities decide on important
matters that affect particular policies under the guidance of fact-based findings.
However, policymakers, business owners and other organization authorities also
typically look at what is desirable and what is not for their respective constituents,
making normative economics an important part of the equation when deciding on
important economic matters.
Paired with positive economics, normative economics can branch into many opinion-
based solutions that mirror how an individual or one whole community portrays
particular economic projects. These kinds of views are especially important for
policymakers or national leaders.

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 BIBLIOGRAPHY

BOOKS

 Introductory Micro Economics, Sandeep Garg, 2015

 The Foundation of Positive and Normative Economics, Andrew Schotter & Andrew
Caplin, 2008
 Essays in Positive Economics, Milton Friedman, 2011.

WEBSITES

 https://www.quora.com/
 https://www.investopedia.com/
 https://study.com/
 https://en.wikipedia.org/wiki/

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