Positive and Normative Economics:

Positive Economics

Positive economics is a stream of economics that focuses on the description, quantification, and
explanation of economic developments, expectations, and associated phenomena. It relies on objective
data analysis, relevant facts, and associated figures. It attempts to establish any cause-and-effect
relationships or behavioral associations which can help ascertain and test the development of economic
theories.

Positive economics is objective and fact-based where the statements are precise, descriptive, and clearly
measurable. These statements can be measured against tangible evidence or historical instances. There
are no instances of approval-disapproval in positive economics.

Here's an example of a positive economic statement: "Government-provided healthcare increases public

expenditures." This statement is fact-based and has no value judgment attached to it. Its validity can be
proven (or disproven) by studying healthcare spending where governments provide healthcare.

Positive economics was popularized by the economist Milton Friedman, who said that economic science
should objectively analyze data without any bias or agenda.

Normative Economics

Normative economics focuses on value-based judgments aimed at improving economic development,

investment projects, and the distribution of wealth. Its goal is to summarize the desirability (or lack
thereof) of various economic developments, situations, and programs by asking what should happen or
what ought to be.

Normative economics is subjective and value-based, originating from personal perspectives or opinions
involved in the decision-making process. The statements of this type of economics are rigid and
prescriptive in nature. They often sound political, which is why this economic branch is also called "what
should be" or "what ought to be" economics.
An example of a normative economic statement is: "The government should provide basic healthcare to
all citizens." As you can deduce from this statement, it is value-based, rooted in personal perspective,
and satisfies the requirement of what "should" be.

The basic economic activities of life are production, distribution, and disposition of goods and services. A
society will be facing scarcity of resources during the time of fulfillment of these activities.

Scarcity is evident, due to the availability of limited resources, and human needs having no limit. This
variation between the supply and demand leads to the formation of central problems of an economy.

Central problems of an economy

The central problems of an economy revolve around the following factors:.

What to produce?

How to produce?

For whom to produce?

Let us discuss these points in detail.

What to produce?

It is one of the central problems in an economy. It is related to the type and quantity of goods and
services that need to be produced.

Since resources are in limited quantities, producing more of one good will result in less production of
the other.
How to produce?

This aspect deals with the process or technique by which the goods and services can be
produced. Generally, there are two techniques of production:

Labour intensive techniques

Capital intensive techniques

The choice of technique for production depends on the availability of the resource in that nation, hence
resource allocation becomes a challenge.

For whom to produce?

This problem deals with determining the final consumers of the goods produced. As resources are scarce
in an economy, it becomes difficult to cater to all sections of the society.

It leads to a problem of choice in an economy as a good that may be in demand among one section, may
not be in demand for another section of the society.

Such a situation arises due to the difference in income distribution among the population, which causes
a change in buying behaviour.

With this, we conclude the concept of central problems of an economy. Stay tuned to our website for
more such exciting updates.

Scarcity and Choice

Where there is scarcity, choices must be made! Scarcity refers to the finite nature and availability of
resources while choice refers to people’s decisions about sharing and using those resources. The
problem of scarcity and choice lies at the very heart of economics, which is the study of how individuals
and society choose to allocate scarce resources.
Concept of opportunity cost

“Opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up.

Production Possibility Frontier

The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output
of two goods that can be produced using available resources and technology. The PPF captures the
concepts of scarcity, choice, and tradeoffs.

The shape of the PPF depends on whether there are increasing, decreasing, or constant costs.

Points that lie on the PPF illustrate combinations of output that are productively efficient. We cannot
determine which points are allocatively efficient without knowing preferences.

The slope of the PPF indicates the opportunity cost of producing one good versus the other good, and
the opportunity cost can be compared to the opportunity costs of another producer to determine
comparative advantage.

Economic System

An economic system is a means by which societies or governments organize and distribute available
resources, services, and goods across a geographic region or country. Economic systems regulate the
factors of production, including land, capital, labor, and physical resources.