NOTES ON BASIC
ECONOMIC PROBLEM AND POSITIVE AND NORMATIVE STATEMENT
GRADE 11, 2012.
(1)
The Economic Problem:
The economic problem is scarcity, i.e. not enough resources to satisfy
everyone’s demand. All economic goods are
scarce, some more and some less so, but all require an allocative mechanism. The
only goods that do not require an allocative mechanism are free
goods. An example of a free good is air, although it is interesting
to note that in a polluted city like Los Angeles fresh air is likely to become
an economic good.
Finite ----- resources
Infinite ----- free goods
People have unlimited wants
however the income of the people are limited. Due to this, it results in
allocation of resources on the basis of best alternative use. As a result of
which, it creates choice. A choice involves the alternative use of
scare resources. When a choice is being made, it leads to opportunity cost. Opportunity cost refers to the next best
alternative forgone. For example, if a government had $10bn to spend
either on nuclear weapons, or better school. If the government decides to spend
it on schools, then the next best alternative is nuclear weapons, making
nuclear weapon the opportunity cost.
Positive and Normative
Statements.
Positive
statements are statements of facts. They are based on testable
theories and facts. It can be proved true or false through facts. A positive
statement deals with explanations and predictions. A positive statement is
about ‘what is’ in other words it goes directly to the route of economic logic.
For example higher interest rates lead to a fall in aggregate demand. This is
an example of a positive statement, because it can be tested by looking at the
past data and determines the truthfulness and accuracy of the statement made by
the particular person.
A
normative statement is based on opinion and value judgment it cannot
be tested by using facts. These types of statements often carry words or
phrases such as ‘ought to’ or ‘should’. Therefore normative statements are
about ‘what should be’ which implies that the statement can go beyond the
economic logic just through a judgment made by a person. For example look at
the following sentence.