Question

4. Economics is sometimes broken down into different categories. 1. Define positive and normative economics. 2. Write your own example of a positive economic statement 3. Write your own example of a normative economic statement. Define microeconomics and macroeconomics. 5. Categorize the following as microeconomic or macroeconomic questions and explain why: a. What are the differences between the dairy industry and the airline industry? b. Why are unemployment rates for teenagers rising? c. Why are prices falling in the digital camera industry? d. Why is the U.S. experiencing low rates of inflation? e. How large is McDonald's share of the fast food industry? f. How will minimum wage rate changes affect your 17 year old brother's budget? g. Why are interest rates rising? h. How will the elimination of the capital gains tax affect the level of investment in the US economy? i. Why are economic growth rates different in the US and China? (15 points)

Answer 1

1) Positive economics establishes a relationship between cause and effect; it analyses problems on the basis of facts. In simple terms, positive economics studies the world as it is and is as such devoid of value judgements. For example, a positive economic theory might describe the probable effect of an increase in price of petroleum on the price of cars, but it would not provide any instruction on what policy should be followed.

Normative economics is concerned with questions involving value judgements; it is that branch of economics that incorporates value judgements about what the economy should be like. It looks like desirability of certain aspects of the economy, say inflation as better than deflation, redistribution of wealth in the economy, etc.

Positive statements are factual by nature, whose truth or falsehood can be verified by empirical study or logic. Normative statements, on other hand, involve some degree of value judgement and cannot be verified by empirical study or logic. Normative statements often imply a recommendation. So that such statements often involve words 'ought' or 'should'.

2) The distribution of income in India is unequal.

Taxes in a particular country are above the average for alike countries.

3) The distribution of income in India should be equal.

There should be a system of progressive taxes to ensure equity.

4) Microeconomics looks at the smaller picture of the economy and is the study of the behaviour of small economic units, such as that of an individual consumer, a seller or a product. It focuses on the basic theories of the supply and demand demand in individual markets. In simple terms microeconomics analyses the market behaviour of individual consumers and firms, in an attempt to understand their decision making process.

Macroeconomics is that branch of economic analysis that deals with the study of aggregations. In macro analysis it study industry as a unit and not the firm. In macroeconomics it talk about aggregate demand and aggregate supply, national income, national capital formation, employment, inflation etc.

However, micro and macro economics are not to be taken as substitutes of each other, rather they complement each other.