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Branches of Economics

Positive And Normative Economics

Economics is broadly divided into two main branches based on the nature of their analysis and the questions they seek to answer:

Positive Economics

Positive economics** deals with economic issues in a factual and objective manner. It describes, explains, and analyzes economic phenomena as they are, were, or will be. It is concerned with "what is" or "what will be."

  • Factual Basis: Statements in positive economics are based on verifiable facts and evidence. They can be tested and proven or disproven through observation and data analysis.
  • Cause and Effect: It focuses on establishing cause-and-effect relationships in economic activities. For example, "If the price of a good increases, then the quantity demanded will decrease (ceteris paribus)."
  • Objective Analysis: It aims for objective analysis, avoiding value judgments or opinions about whether something is good or bad.
  • Examples:
    • "An increase in the minimum wage will lead to higher unemployment among low-skilled workers."
    • "Inflation in India was 6% last year."
    • "A tax cut will likely increase consumer spending."

Normative Economics

Normative economics**, on the other hand, deals with value judgments and opinions. It is concerned with "what ought to be" or "what should be." It involves economic policies, recommendations, and value-based statements about how the economy should be organized.

  • Value Judgments: Statements in normative economics are based on opinions, beliefs, and ethical considerations. They cannot be empirically tested or proven true or false in the same way as positive statements.
  • Policy Recommendations: It focuses on recommending policies to achieve certain economic goals or correct perceived economic problems.
  • Subjective Analysis: It is inherently subjective, reflecting the values and priorities of the person making the statement.
  • Examples:
    • "The government should increase taxes on the rich to reduce income inequality."
    • "Unemployment benefits should be increased to provide a better safety net."
    • "It is unfair that some people earn much more than others."

While positive economics provides the factual basis for policy decisions, normative economics helps in shaping those policies based on societal goals and values.


Microeconomics And Macroeconomics

Economics is also divided into two major branches based on the level of analysis:

Microeconomics

Microeconomics** is the branch of economics that studies the economic behaviour of individual decision-making units, such as households, firms, and individual markets. It focuses on:

  • Individual Choices: How households decide what to consume and how firms decide what to produce and how much to charge.
  • Markets: The functioning of individual markets, including supply and demand, price determination, and market structures (perfect competition, monopoly, oligopoly).
  • Resource Allocation: How scarce resources are allocated among competing uses at the individual and firm level.
  • Topics Covered: Consumer behaviour, producer behaviour, market equilibrium, elasticity, costs of production, pricing strategies, market failures.
  • Examples: Analyzing the impact of a rise in petrol prices on car sales, studying how a firm decides its production output, or understanding how wages are determined in a particular industry.

Macroeconomics

Macroeconomics** is the branch of economics that studies the economy as a whole. It examines aggregate economic phenomena and the economy in its entirety.

  • Aggregate Behaviour: Focuses on the behaviour of the economy as a whole, rather than individual units.
  • Economy-wide Variables: Studies topics like national income, aggregate demand and supply, inflation, unemployment, economic growth, and the balance of payments.
  • Policy Focus: Primarily concerned with government policies aimed at achieving macroeconomic goals, such as full employment, price stability, and economic growth.
  • Topics Covered: National income accounting (GDP), fiscal policy, monetary policy, international trade, economic development, business cycles.
  • Examples: Analyzing the causes of inflation in India, studying the impact of government spending on economic growth, or examining the factors influencing unemployment rates nationwide.

Microeconomics and macroeconomics are interconnected; macroeconomic phenomena are the aggregate results of countless microeconomic decisions.