Positive and Normative Analysis

Positive and Normative Analysis:

The positivistic methodology is concerned with describing how things are, which is called positive analysis. The question of how things ought to be is in the realm of normative analysis. If economics only concerned itself with how things are, it would be less interesting than it is. However, economists (even if they are sometimes very arrogant) have no business telling other people what should be done. This is not what normative economics does however; instead it tries to answer questions of the following sort: If society thinks that the current income distribution is too unequal and tries to rectify this by taxing the rich and giving the money to the poor, what consequences will this have for the behavior of rich and poor, and on market prices? In an effort to be as value-neutral as possible, economist have chosen to focus on the efficiency properties of various resources allocation mechanisms (such as markets, rationing, centralized allocation etc.) By efficiency economists means Pareto−efficiency, or sometimes we say Pareto-optimality. A situation (allocation) is said to be Pareto-optimal (or simply efficient) if there is no other way of distributing resources so that it is possible to make someone better off without making someone else worse off. This principle seems to be quite weak: If there are unused resources lying around, why should we not give them to someone who values them? We’re going to analyze in great length the behavior of individual consumers in a market system. After that we’ll analyze the efficiency properties of the market system. This will lead us to some important conclusions about the conditions under which this system leads to efficient allocations of resources. It will also identify situations then markets do not work well, and when government intervention is called for. It will also put some light on the role of the laws, and the legal system, in the market system. However, we’ll start by analyzing the behavior of individuals, in their role as consumers.

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