Study Notes
Economic methodology involves understanding the difference between positive and normative economics, the use of logic, models, hypotheses, and theories in economic analysis, and the importance of empirical evidence and refutation. It also includes the role of value judgments in policy making and the distinction between equity and equality.
- Positive Economics — Describes, explains, and predicts economic events using logic and models. Example: Analyzing the impact of tax changes on consumer spending.
- Normative Economics — Based on subjective beliefs and value judgments about what should happen. Example: Deciding whether the government should increase minimum wage.
- Logic — A method of reasoning that involves making true statements based on preceding true statements. Example: If demand increases, then prices will rise, assuming supply remains constant.
- Hypothesis — An educated guess about a cause and effect relationship in economics. Example: If interest rates decrease, then investment will increase.
- Ceteris Paribus — An assumption that all other variables are held constant except the ones being studied. Example: The law of demand assumes ceteris paribus when stating that price and quantity demanded are inversely related.
- Empirical Evidence — Real-world data and observations used to test hypotheses. Example: Using survey data to analyze consumer behavior.
- Refutation — The practice of disproving hypotheses or theories through empirical testing. Example: Testing a theory about inflation and finding it inconsistent with observed data.
- Equity — The concept of fairness and just treatment. Example: Implementing progressive taxation to achieve equity.
- Equality — The concept of same treatment for all. Example: Providing equal access to education for all students.
Exam Tips
Key Definitions to Remember
- Positive Economics
- Normative Economics
- Logic
- Hypothesis
- Ceteris Paribus
- Empirical Evidence
- Refutation
- Equity
- Equality
Common Confusions
- Confusing positive statements with normative statements
- Misunderstanding the difference between equity and equality
Typical Exam Questions
- What is the difference between positive and normative economics? Positive economics is based on factual statements, while normative economics is based on value judgments.
- How does ceteris paribus help in economic analysis? It allows economists to isolate the effect of one variable by holding others constant.
- Why is empirical evidence important in economics? It provides real-world data to test and validate economic theories.
What Examiners Usually Test
- Ability to distinguish between positive and normative statements
- Understanding of how hypotheses are tested in economics
- Application of the ceteris paribus assumption in economic models