Unit 1
Introduction to Economics
1.4 Economic Methodology
So far ....
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Now .....
The study of the processes, practices and
principles in relation to the discipline of
economics as a social science.
Three key aspects:
◦ how economics functions
◦ how it could function, and
◦ how it should function.
Economic methodology
Economics as a Social Science
Economics is regarded as a social
science because it uses scientific
methods to build theories that can help
explain the behaviour of individuals,
groups and organisations
Positive Vs. Normative Economics
Positive economics is the study of
economics that is provable.
Factual statements about the economy or
statements of ‘what is.
relies on reasoning, logic and empirical
evidence.
can be verified or refuted by referring to
facts, evidence or further investigation.
Positive Economic Statements
Customers will buy more of a product if
the price is reduced.
A fall in average incomes will lead to
higher unemployment in the economy.
Increasing the national minimum wage
will raise costs for businesses.
A reduction in income tax rates will create
incentives for people to find employment.
Refers to rationality and reasoning, rather
than emotions or beliefs.
presenting and analysing facts and data
as they are
Helps to explain a chain of statements to
deduce truth regarding a hypothesis,
model or theory
Logic in Positive Economics
• Hypothesis is an assumption, notion or educated
guess made before research has been conducted.
Hypothesis • often based on an observation or idea
• A model occurs when a hypothesis has been repeatedly tested
and proven or rejected.
• Accepted by economists once they have been thoroughly tested
Model and can be used to explain the real world using empirical
evidence and data
• A theory is a broad generalization used to explain
situations or scenarios already supported by economic
Theory evidence and data from economic models
The use of hypotheses, models
and theories
A situation where ‘other things remain
equal’ or are unchanged.
allows economists to simplify a situation
by assuming that apart from a single
change of circumstances, everything else
is unchanged.
ceteris paribus
First-hand data and information acquired
by observation or experimentation of
certain behaviours and patterns.
important aspect of positive economics
it involves looking at what has happened
in the economy and what is currently
happening in order to make logical and
rational predictions for the future.
Empirical evidence
Positive economic statements verified or
rejected.
Based on the facts, data and empirical
evidence or further investigation.
An economic statement is considered to
be false if it is refuted (rejected) by the
empirical evidence.
Refutation
Normative economic statements focus
on value judgements
These judgements are built around opinions
and beliefs as to what the best economic
policies or solutions may be
cannot be verified or refuted by referring to
facts, evidence or further investigation
Normative Statements
Equity - concerned with economic fairness in
the distribution of resources
justifies the use of the price mechanism to
rationalize the allocation of scarce resources.
Equality - regards everyone being equal
is about social fairness and collectivism from
the perspective of a planned economic
system
Equity and Equality
