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    Positive Economics and Normative Economics: Economics Is The Study of Choice

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    Ceyp Inem Cali
    Economics is the study of choice. Positive economics generates objective descriptions and predictions about the world that can be verified with data, such as predicting future household savings rates. Normative economics recommends what individuals and society ought to do based on subjective judgments, such as advising a worker on how much to save for retirement based on their preferences for future consumption. Normative analysis is also used to evaluate public policies, which requires economists to make ethical judgments when policies have both benefits and costs for different groups.

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    Positive Economics and Normative Economics: Economics Is The Study of Choice

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    Ceyp Inem Cali
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    Economics is the study of choice. Positive economics generates objective descriptions and predictions about the world that can be verified with data, such as predicting future household savings rates. Normative economics recommends what individuals and society ought to do based on subjective judgments, such as advising a worker on how much to save for retirement based on their preferences for future consumption. Normative analysis is also used to evaluate public policies, which requires economists to make ethical judgments when policies have both benefits and costs for different groups.

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    Economics is the study of choice. Positive economics generates objective descriptions and predictions about the world that can be verified with data, such as predicting future household savings rates. Normative economics recommends what individuals and society ought to do based on subjective judgments, such as advising a worker on how much to save for retirement based on their preferences for future consumption. Normative analysis is also used to evaluate public policies, which requires economists to make ethical judgments when policies have both benefits and costs for different groups.

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    © All Rights Reserved
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    23 views1 page

    Positive Economics and Normative Economics: Economics Is The Study of Choice

    Uploaded by

    Ceyp Inem Cali
    Economics is the study of choice. Positive economics generates objective descriptions and predictions about the world that can be verified with data, such as predicting future household savings rates. Normative economics recommends what individuals and society ought to do based on subjective judgments, such as advising a worker on how much to save for retirement based on their preferences for future consumption. Normative analysis is also used to evaluate public policies, which requires economists to make ethical judgments when policies have both benefits and costs for different groups.

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    Positive Economics and Normative Economics

    We now have an idea of what economics is about: people’s choices. But what is the reason 1.1
    for studying choices? Part of the answer is that economists are just curious, but that’s only
    a small part of the picture. Understanding people’s choices is practically useful for two key
    reasons. Economic analysis: 1.2
    1.
    Describes what people actually do (positive economics).
    2.
    Recommends what people ought to do (normative economics).
    1.3
    The first application is descriptive and the second is advisory.

    Positive Economics Describes What People Actually Do  Descriptions


    of what people actually do are objective statements about the world. Such factual 1.4
    statements can be confirmed or tested with data. For instance, it is a fact that in 2010,
    50 percent of U.S. households earned less than $52,000 per year. Describing what
    has happened or predicting what will happen is referred to as positive economics or 1.5
    positive economic analysis.
    For instance, consider the prediction that in 2020 U.S. households will save about
    Economics is the study 5 percent of their income. This forecast can be compared to future data and either con-
    of choice. firmed or disproven. Because a prediction is ultimately testable, it is part of positive 1.6

    Positive economics is analysis that


    economics.
    generates objective descriptions or
    predictions about the world that can Normative Economics Recommends What People Ought to Do  Normative
    be verified with data. economics, the second of the two types of economic analysis, advises individuals and
    society on their choices. Normative economics is about what people ought to do.
    Normative economics is analysis Normative economics is almost always dependent on subjective judgments, which means
    that prescribes what an individual or
    society ought to do.
    that normative analysis depends at least in part on personal feelings, tastes, or opinions.
    So whose subjective judgments do we try to use? Economists believe that the person being
    advised should determine the preferences to be used.
    For example, if an economist were helping a worker to decide how much to save for re-
    tirement, the economist would first ask the worker about her own preferences. Suppose the
    worker expressed a high degree of patience—“I want to save enough so I can maintain my
    level of expenditure when I retire.” In this case, the economist would recommend a saving
    rate that achieves the worker’s desire for steady consumption throughout her life—about
    10 to 15 percent of income for most middle-income families. Here the economist plays
    the role of engineer, finding the saving rate that will deliver the future level of retirement
    spending that the worker wants.
    The economist does not tell the worker what degree of patience to have. Instead, the
    economist asks the worker about her preferences and then recommends a saving rate that is
    best for the worker given her preferences. In the mind of most economists, it is legitimate
    for the worker to choose any saving rate, as long as she understands the implications of that
    saving rate for expenditure after retirement.

    Normative Analysis and Public Policy  Normative analysis also generates advice to
    society in general. For example, economists are often asked to evaluate public policies, like
    taxes or regulations. When public policies have winners and losers, citizens tend to have
    opposing views about the desirability of the government program. One person’s migratory
    bird sanctuary is another person’s mosquito-infested swamp. Protecting a wetland with
    environmental regulations benefits bird-watchers but harms landowners who plan to
    develop that land.
    When a government policy has winners and losers, economists will need to make some
    ethical judgments to conduct normative analysis. Economists must make ethical judgments
    whenever we evaluate policies that make one group worse off so another group can be
    made better off.
    Ethical judgments are usually unavoidable when economists think about government
    policies, because there are very few policies that make everyone better off. Deciding
    whether the costs experienced by the losers are justified by the benefits experienced by the
    winners is partly an ethical judgment. Is it ethical to create environmental regulations that
    prevent a real estate developer from draining a swamp so he can build new homes? What if

    Section 1.1 | The Scope of Economics 37

    M01_ACEM0635_01_GE_CH01.indd 37 17/03/15 12:39 PM

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