Positive Economics

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Definition of Positive Economics:

Positive economics is the approach to economics that emphasizes facts, such as how the world works, or cause and effect relationships, rather than how the world should work and what is equitable. Economists use positive economics to predict outcomes of economic policies and business strategies. 

Detailed Explanation:

In positive economics, economists examine how the world works by looking at causes and effects. Generally, the ideas they examine are testable and their method of inquiry does not include value judgment. They make positive statements of fact and exclude all personal interpretations or perspectives. For example, assume that the government determines that income should be redistributed. This is normative economics. Once decided, economists use positive economics to determine the best way to achieve efficient income distribution by looking at different tax structures. The testing is objective and does not consider value judgments. 

Judy's Car Wash offers another example of the difference between positive and normative economics. Sales at Judy's Car Wash increased 9% during the past year. The industry average was only 5%, however, Judy was very disappointed because her aggressive advertising campaign did not generate the 15% increase in sales she expected. "Judy's Car Wash sales increased 9%." is a positive statement. It is a fact. "A 9% increase in sales is disappointing." is a normative statement because it is an opinion. For Judy, the sales increase was disappointing, but her banker found the news encouraging.

Below are several examples of normative and positive statements. 

Normative Statements:
  • The rich should pay a much higher income tax.
  • More lenient immigration policies will lower wages.
  • Social security payments should begin at 70.
  • Everyone should have access to medical treatment, no matter what the cost.
  • Companies ought to pay for their pollution.
Positive Statements:
  • Tax revenues would increase if the tax rate for families earning more than $250,000 is raised to 50%.
  • The unemployment rate is currently 5%.
  • If the price of hamburger meat is reduced by $0.50 a pound, the quantity demanded at a local grocery store will increase by 600 pounds per month. 
  • Lower mortgage rates will increase home sales.
  • Some companies will go out of business if they are forced to pay for pollution abatement.

Dig Deeper With These Free Lessons:

Fundamental Economic Assumptions
Economics – Managing Our Scarce Resources
Fiscal Policy – Managing an Economy by Taxing and Spending
The Federal Budget and Managing the National Debt

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