Positive vs Normative Economics

Positive economics

• Definition: Objective statements about the economy that can be tested with factual evidence and accepted or rejected based on data.
• Identification cues: often use verbs like "will" or "is"; testable by evidence.
• Examples from transcript:
  • "Raising the tax on alcohol will lead to a fall in the demand of alcohol and a fall in the profits of pub landlords."
  • "Higher temperatures will lead to an increase in the demand for sun cream."
• Core takeaway: Positive statements describe how the world is; they can be validated or refuted.

Normative economics

• Definition: Statements based on value judgments; subjective and prescriptive.
• Identification cues: often use words like "should" and suggest one policy as better than another.
• Examples from transcript:
  • "The free market is the best way to allocate resources."
  • "The government should increase the tax on alcohol."
• Implications: Different economists may draw different conclusions from the same statistic because of value judgments.
• Key point: Normative analysis shapes policy preferences and recommendations.