Normative Economics - Explained
What is a Normative Economics?
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What is Normative Economics?
Normative economics seeks to determine the objectives or preferences of society and employs economic policies toward achieving those objectives or preferences. Economic policies are used to make things "how they should be".
How Does Normative Economics Compare to Positive Economics?
Normative economics is different from positive economics, which depends on the analysis of the given data. It seeks to explain "how things are" and why?
Normative economics is an approach to economics that focuses on making value judgements about the desirability of an outcome or scenario instead of analyzing data based upon causal relationships.
How is Normative Economics Used?
The main objective of normative economics is to ascertain the preference of individuals about several economic programs, scenarios, and conditions with a question what should happen or what ought to be.
Hence, such statements represent a perception or a view about what seems to be preferable. For instance, an objective to increase the economic growth by x% or decrease inflation by y% comes under normative economics.
What is Behavioral Economics?
Behavioral economics is considered as normative assuming that people use cognitive psychology for taking preferred decisions considering their choices and preferences.
How Do Statements Relate to Normative Economics?
The statements revolving around normative economics make recommendations for making changes in the economic policies and to persuade the economic-decision making process. It is not possible to either verify or test normative economic statements.
Real world examples of normative economic statements
The normative economic statement would be something like this:
For enhancing the levels of disposable income, we should focus on reducing taxes to half. On the other hand, a positive economic observation would be: According to the last years statistics, huge reduction in tax rates would benefit lots of taxpayers, but considering the government budget, we cannot prefer reducing taxes for now. The above example talks about normative economics based on the assumption of increasing disposable income levels of people.
Normative statements are not meant to be tested or verified for facts, or actual cause and effect relationship. Example, ladies should receive more educational loans than men, laborers should be given more portion of capital profits, or working class should not incur any medical expenses. Usually, one can identify normative economic statements with the words should and ought.
- Total Utility (Economics)
- Efficiency Principle
- Indifference Curve
- Time Preference Theory of Interest
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost