POSITIVE AND NORMATIVE ECONOMICS

It was mentioned earlier that in principle there are more than one ways of solving the central problems of an economy. These different mechanisms in general are likely to give rise to different solutions to those problems, thereby resulting in different allocations of the resources and also different distributions of the final mix of goods and services produced in the economy. Therefore, it is important to understand which of these alternative mechanisms is more desirable for the economy as a whole. In economics, we try to analyse the different mechanisms and figure out the outcomes which are likely to result under each of these mechanisms. We also try to evaluate the mechanisms by studying how desirable the outcomes resulting from them are. Often a distinction is made between positive economic analysis and normative economic analysis depending on whether we are trying to figure out how a particular mechanism functions or we are trying to evaluate it. In positive economic analysis, we study how the different mechanisms function, and in normative economics, we try to understand whether these mechanisms are desirable or not. However, this distinction between positive and normative economic analysis is not a very sharp one. The positive and the normative issues involved in the study of the central economic problems are very closely related to each other and a proper understanding of one is not possible in isolation to the other.

MICROECONOMICS AND MACROECONOMICS Traditionally, the subject matter of economics has been studied under two broad branches: Microeconomics and Macroeconomics. In microeconomics, we study the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets. In macroeconomics, on the other hand, we try to get an understanding of the economy as a whole by focusing our attention on aggregate measures such as total output, employment and aggregate price level. Here, we are interested in finding out how the levels of these aggregate measures are determined and how the levels of these aggregate measures change over time. Some of the important questions that are studied in microeconomics are as follows: What is the level of total output in the economy? How is the total output determined? How does the total output grow over time? Are the resources of the economy (eg labour) fully employed? What are the reasons behind the unemployment of resources? Why do prices rise? Thus, instead of studying the different markets as is done in microeconomics, in macroeconomics, we try to study the behaviour of aggregate or macro measures of the performance of the economy.