The study of how households and firms make decisions and how they interact in markets
The study of economy wide phenomena, including inflation, unemployment and economic growth
Many subjects are studied on various levels. Consider biology for example Molecular biologists study the chemical compounds that makes up living things. Cellular biologists study cells which are made up of many chemical compounds and, at the same time, are themselves the building blocks of living organisms. Evolutionary biologist studies the many varieties of animals and plants and how species change gradually over the centuries.
Economics is also studied on various levels. We can study the decisions of individual households and firms. Or we can study the interaction of households and firms in markets for specific goods and services. Or we study the operation of the economy as a whole which is the sum of the activities of all these decision makers in all these markets.
The field of economics is traditionally divided into two subfields. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economy wide phenomena. A micro economist might study the effects of rent control on housing in New York City, the impact of foreign competition on the US auto industry or the effects of compulsory school attendance on workers’ earnings. A macroeconomist might study the effects of borrowing by the federal government, the changes over time in the economy’s rate of unemployment or alternative policies to raise growth in national living standards.
Microeconomics and macroeconomics are closely intertwined. Because changes in overall economy arise from the decisions of millions of individuals it is impossible to understand macroeconomics developments without considering the associated microeconomic decisions. For example, a macroeconomist might study the effect of a cut in the federal income tax on the overall production of goods and services. To analyze this issue he or she must consider the tax cut affects the decisions of households about how much to spend on goods and service.
Despite the inherent link between microeconomics and macroeconomics the two fields are distinct. Because they address different questions, each field has its own set of models, which are often taught in separate courses.
The economist as policy adviser
Often, economists are asked to explain the causes of economic events. Why for example, is unemployment higher for teenagers than for older workers? Sometimes economists are asked to recommend policies to improve economic outcomes. What for instances should the government do to improve the economic well being if teenagers? When economists are trying to explain the world, they are scientists. When they are trying to help improve it, they are policy advisers.
Positive versus normative Analysis
To help clarify the two roles that economists play, we begin by examining the use of language. Because scientists and policy advisers have different goals, they use language in different ways.
For example, suppose hat two people are discussing minimum wage laws. Here are two statements you might hear:
POLLY: Minimum wage laws cause unemployment.
NORMA: The government should raise the minimum wage.
Ignoring for now whether you agree with these statements notice that Polly and Norma differ in what they are trying to do. Polly is speaking like scientists: She is making a claim about how the world works. Norma is speaking like a policy adviser: She is making a claim about how she would like to change the world.
In general, statements about the world are of two types. One type such as Polly’s is positive. Positive statements are descriptive. They make a claim about how the world is. A second type of statement such as Norma’s is normative. Normative statements are prescriptive . They make claim about how the world ought to be.
Positive and normative statements are fundamentally different but they are often closely intertwined in a person’s set of beliefs. In particular positive views about how the world works affect normative views about what policies are desirable. Polly’s claim that the minimum wage causes unemployment if true might lead her to reject Norma’s conclusion that the government should raise the minimum wage. Yet, normative conclusions cannot come from positive analysis alone; they involve value judgments as well.
As you study economics keep in mind the distinction between positive and normative statements because it will help you stay focused on the task at hand. Much of economics is positive. It just to explain hoe the economy works. Yet those who use economics often have goals that are normative. They want to learn ho to improve the economy. When you hear economists making normative statements you know they are speaking not as scientists but as policy advisers.