Economic Methodology

Economic methodology describes how economists approach research, make assumptions, and reach conclusions. There are 2 main ways economists approach the world, according to the IB syllabus: Positive and normative economics.

The Role of Positive Economics (AO2)

Positive economics refers to objective statements about the economy. For example:

"Apple will increase the price of their upcoming phones by 15%. Therefore, they will likely experience a drop in sales, ceteris paribus."

In this example, a few assumptions are being made which allows for the conclusion to be made:

• Logic: As the price of a good increases, less people will be able to afford it, which will decrease the number of purchases.

• Hypotheses, models, and theories: Using basic microeconomic models, (which you will learn more about later), quantity demanded decreases as price increases, and we can apply this theory to this news.

• The "ceteris paribus" assumption: Ceteris paribus is Latin, and means "All other things being equal". It is an important phrase in economics, as we want to control all other variables. In this example, we don't know if Apple's new phones are much better than before, or if rivals have also increased their prices; we therefore assume these factors remain constant, and say ceteris paribus as a way to cover our bases.

• Empirical evidence: To strengthen our argument, we can also refer to previous research and data that proves the law of demand exists in real life (empirical evidence of consumers buying less of things when they increase in price).

Positive economic statements can be refuted, meaning they can be proven as objectively false. For example, if Apple now see an increase in sales, as the higher price increases the exclusivity/luxury of the phones, our statement is proven to be false and we have to accept that.

The Role of Normative Economics (AO2)

Normative economics refers to subjective judgements about the economy. For example:

"Apple will increase the price of their upcoming phones by 15%. This is greedy behavior, and consumers should avoid buying iPhones to show Apple they can't get away with this."

Notice how unlike our positive economic statement, this is not a statement that can be proven or refuted, but is rather a value judgement, which can be influenced by our own morals and values.

• Despite this, value judgements are often used in policymaking, as we usually prefer things that "feel right" for us.

• For example, some might want taxes much higher on the rich because it feels more fair, while the rich want lower taxes because that feels more fair to them, and they will oppose each other, even if the theoretical "fairest" tax level is somewhere in the middle.

Normative economics can also be important to promote equity and equality, as these deal with fairness.

• Equity in economics means that everyone is given the same chances in life, but that those who work harder and more should be rewarded accordingly.

• Equality means that everyone is treated equally. This might sound similar to equity, but is more about "sameness" rather than "fairness".