Economics
Introduction
1. Economic policy
An economic policy is a course of action that is intended to influence or control the
behavior of the economy. Economic policies are typically implemented and
administered by the government. Examples of economic policies include decisions made
about government spending and taxation, about the redistribution of income from rich
to poor, and about the supply of money. The effectiveness of economic policies can be
assessed in one of two ways, known as positive and normative economics.
1.1. Positive economics
Attempts to describe how the economy and economic policies work without resorting to
value judgments about which results are best. The distinguishing feature of positive
economic hypotheses is that they can be tested and either confirmed or rejected. For
example, the hypothesis that “an increase in the supply of money leads to an increase in
prices” belongs to the realm of positive economics because it can be tested by
examining the data on the supply of money and the level of prices.
1.2. Normative economics
Involves the use of value judgments to assess the performance of the economy and
economic policies. Consequently, normative economic hypotheses cannot be tested. For
example, the hypothesis that “the inflation rate is too high” belongs to the realm of
normative economics because it is based on a value judgment and therefore cannot be
tested, confirmed, or refuted. Not surprisingly, most of the disagreements among
economists concern normative economic hypotheses.
1.3. Goals of economic policy
The goals of economic policy consist of value judgments about what economic policy should
strive to achieve and therefore fall under the heading of normative economics. While there
is much disagreement about the appropriate goals of economic policy, several appear to
have wide, although not universal, acceptance. These widely accepted goals include:
1. Economic growth: Economic growth means that the incomes of all consumers and firms
(after accounting for inflation) are increasing over time.
2. Full employment: The goal of full employment is that every member of the labor force
who wants to work is able to find work.
3. Price stability: The goal of price stability is to prevent increases in the general price level
known as inflation, as well as decreases in the general price level known as deflation.
Economic analysis
1.1. Economic analysis is marginal analysis
In marginal analysis, one examines the consequences of adding to or subtracting from
the current state of affairs. Consider, for example, an employer's decision to hire a new
worker. The employer must determine the marginal benefit of hiring the additional
worker as well as the marginal cost. The marginal benefit of hiring the worker is the
value of the additional goods or services that the new worker could produce. The
marginal cost is the additional wages the employer will have to pay the new worker. An
economic analysis of the decision to hire the new worker involves weighing the marginal
benefits against the marginal costs. If the marginal benefits are greater than the
marginal costs, then it makes sense for the employer to hire the worker. If not, then the
new worker should not be hired.
