Saturday, January 2, 2010

Micro vs. Macro, Positive vs. Normative

The study of economics can be divided into two large subcategories, microeconomics and macroeconomics. Microeconomics is the study of individual decision-making and focuses on individual households and firms. Subjects that fit under microeconomics include the great theory of supply and demand, elasticity, theory of the firm, and market failure. Alternatively, macroeconomics is the study of the economy as a whole. Subjects that fit under macroeconomics include national income (GDP), AS/AD model, inflation, unemployment, and redistribution of income.

A positive statement (and positive economics) is based on testable facts. The following statement is positive in nature : "Inflation increased 3% in the Eurozone in 2008". However, the fact does NOT have to be true. However, economists conduct research to realize economic facts and thus create positive economics.

A normative statement is based on opinion. "The Eurozone central bank should increase its base rate to fight inflation" is a normative statement. Policymakers argue using normative statements and normative economics.

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