Introduction to Economics-2
BBA-LLB
Economics
6-11-2020
Positive Economics and Normative
Economics
• Positive economics is concerned with explaining what is , that is, it
describes theories and laws to explain observed economic phenomena
• Normative economics is concerned with what should be or what ought to
be the things.
• J.N Keynes draws the distinction between the two types of economics in
the following manner: “ A positive science may be defined as a body of
systematized knowledge concerning what is, normative science or a
regulative science is a body of systematized knowledge relating to criteria
of what ought to be concerned with the ideal as distinguished from the
actual … the objective of a positive science is the establishment of
uniformities, of a normative science, the determination of the ideals.
• In positive microeconomics-we are concerned with the determination
of relative prices and the allocation of resources between different
commodities.
• In positive macroeconomics, we are broadly concerned with how the
level of national income and employment, aggregate consumption
and investment and the general level of prices are determined.
• In these parts of positive economics, what should be the prices, what
should be the saving rate, what should be the allocation of resources,
and what should be the distribution of income.
• The question of what should be and what ought to be fall within the
purview of normative economics. Thus, given the profit max.
assumption positive economics states that monopolist will fix a price
which will equate marginal cost with marginal revenue.
• The question what price should be or ought to be fixed so that
maximum social welfare is achieved lies outside the purview of
positive economics.
• Similarly, given the monopoly in the labour market, positive
economics explains what actual wage rate is determined.
• Likewise, how national income between different individuals is
distributed falls within the domain of positive economics.
• But positive economics is not concerned with the question of how
income should be distributed.
• On the other hand, normative economics is concerned with
describing what should be the things. –it is therefore called
perspective economics.
• What price for a product should be fixed, what wage should be paid,
how income should be distributed-falls within the purview of
normative economics.
• Value judgements of various individuals differ and their rightness or
wrongness cannot be decided on the basis of scientific logic and laws.
• Positive economics should be kept separate from normative
economics.
• Normative economics involve value judgement-it should not be
considered meaningless or not meaningful.
• Many vital issues concerning economic welfare of the society
necessarily involves some value judgement.
• Economics-betterment of people –adopt certain norms, ideas or
criteria aim to evaluate economic policies and pass judgements.
Micro-Economics and Macro Economics
• The subject matter of economics is divided into two
parts-Microeconomics and Macroeconomics.
• The term microeconomics is derived from the Greek word mikros
meaning small and the term macroeconomics is derived from the
Greek word makros meaning large.
• Thus microeconomics deals with the analysis of small individual units
such as various industries and markets.
• On the other hand, macroeconomics concerns with the analysis of
the economy as a whole and its large aggregates such as total
national output, income and employment , total consumption and
aggregate investment.
• Microeconomics-studies-behaviour and economic
actions-individuals-units-small groups
• Consumers, producers, or firms, thousand of workers, resource suppliers,
-work and reach the equilibrium state.
• Microscopic study of the economy
• Discuss the equilibrium of innumerable units-piecemeal and their
interrelationship with each other.
• We study the demand of an individual consumer for a good and there on
we derive the market demand for the good.
• How different units-seek to attain equilibrium position from the individual
units to single industry to single market.
• Study of economic system or economy as a whole-outside the
domain of microeconomics.
• Microeconomic Theory studies resource allocation, product and
factor pricing
• Takes the total quantity of resources as given and seeks to explain
how they are allocated to the production of particular good.
• It is the allocation of resources that determines what goods shall be
produced and how they shall be produced.
• The allocation depend prices of various goods
• Theory of product pricing, factor pricing, and theory of factor
distribution lies within the domain of microeconomics.
• The theory of distribution explains how wages (price for the use of
labour), rent (payment for the use of land), interest (price for the use
of capital) and profits (the reward for the entrepreneurship) are
determined.
• The theory of product pricing and factor pricing are two important
branches of microeconomic theory.
• Theory of product pricing-how the relative prices of cotton, cloth or
food grains are determined.
• Micro-Economics is a study of economic efficiency
• Microeconomics also seek to explain welfare economics
