Think like an Economist

Question 1

What is the difference between positive and normative analysis in economics?

Answer 1

Positive analysis describes how the world is (fact-based, testable, e.g., “Unemployment is 5%”).

Normative analysis prescribes how the world should be (value-based, e.g., “The government should reduce unemployment”).

Question 2

Why do economists use models?

Answer 2

To simplify complex realities (e.g., supply-demand curves) by making assumptions, allowing focus on key cause-effect relationships.

Question 3

What does microeconomics study?

Answer 3

Decisions of households/firms (e.g., consumer choices, market competition) and their interactions in specific markets.

Question 4

What does macroeconomics study?

Answer 4

Economy-wide phenomena like GDP growth, inflation, and unemployment.

Question 5

How do economists act as scientists vs. policy advisors?

Answer 5

Scientists: Use models to explain the world (positive analysis).

Advisors: Recommend policies to improve outcomes (normative analysis).

Question 6

Give an example of a positive and a normative statement.

Answer 6

Positive: “A carbon tax reduces emissions by 10%.”

Normative: “Governments should impose carbon taxes.”