pcecon.com Class Notes
How Economics Studies Scarcity and Choices
I bet you could get most of this from the book, but here are a few elaborations.
Economics assumes people act, choose, and behave rationally.
Rational behavior simply means that a person will generally do whatever gets her what she wants, given the limitations she faces. Most people, most of the time, will not behave completely randomly. We do all make mistakes, but we learn from them. Also, if we make too many, or if we fail to learn from them (or if we act irrationally), some or all of our ability to make choices in the future will be taken away from us by circumstances or people around us.
In this context, when we say that a person will act to get "what she wants," we do not necessarily mean that she will be strictly selfish. The person may want to help someone else in some way, for instance. However, whatever she wants most (a tasty dessert, something for her children, a nap, time alone, a chance to help her favorite charity, etc.), she will tend to act in the way that helps her get it.
Each person's wants, desires, and values are subjective.
That is, each of us might want something different, and we each have different priorities. Understanding the choices that a person makes requires us to understand the values of that person, even if we don't share them.
Once a person's values are understood, her behavior is rational and thus predictable.
For example, a person in my family was a drug addict. Other family members who did not know this (or could not accept it) could not understand why she was lying, stealing, and endangering her children. However, since her priority was getting drugs, her behavior was rational; she would always choose to do whatever would get her drugs, and would not be concerned with the other consequences of her actions. MY values (and I hope yours) would lead me to say that her behavior was stupid. However, her behavior was consistent with her values, and thus rational in that context.
Economics tries to study people scientifically.
That is, we start with a theory, make observations to test that theory, and then revise the theories if needed.
We separate our own opinions and preferences from testable theory.
Positive statements, such as "my dog has four legs," or "if I call my dog's name, she will come over to me," can be tested or verified. Thus, they are compatible with being scientific. We can count my dog's legs, and we can see if she comes when I call her. If the count of my dog's legs does not total four, then we can change the theory. If my dog does not come when I call her, then we can change that theory as well. In the latter case, a more accurate statement might be "If I call my dog's name, and if she is not eating, she will come to me."
Even if the statement does not test out to be accurate, it is a positive statement in that it can be tested or verified.
Normative statements cannot be tested or verified, because they are statements of opinion. Examples would include "my dog is beautiful" or "my dog is the best." Even if I feel very strongly about them, there is no way to test them. Also, a person with different values might look at my dog and have different opinions. That is all that a normative statement is-- an opinion that cannot be factually verified. Someone else can agree or disagree, but there is no fact to settle when a normative statement is made.
Can you tell which of the following statements about the Presidential candidates are positive, and which are normative?
1) Bill Clinton did not receive a majority of the popular vote in either of his presidential elections.
2) George W. Bush has a Master's Degree from Harvard University.
3) Ronald Reagan saved 77 lives as a lifeguard.
4) Jimmy Carter was a peanut farmer.
5) Jerry Ford was a better President than Richard Nixon.
6) George W. Bush is a wimpier President than Ronald Reagan.
7) John F. Kerry was elected President on Nov. 8, 2004.
8) John F. Kennedy was financially wealthier than George W. Bush.
9) Franklin Roosevelt was braver than Jimmy Carter.
10) Abraham Lincoln was more honest than Richard Nixon.
11) Ronald Reagan was taller than Abraham Lincoln.
1 is true (he received the most votes of any candidate, but never got to 50% of the total votes). 2, 3, 4, are all positive (and correct) statements. 5 and 6 are normative. 7 is a positive statement, but not correct. 8 is positive (and correct). 9 is probably normative, as stated, since there are many kinds of bravery and no test for it. Similarly, 10 is probably normative (although it might be restated to be positive, if each person's statements in public were tallied and verified, although both guys were politicians and thus did not to make very many testable statements). 11 is positive, but incorrect (Lincoln was the tallest of all presidents, at 6'4"; Reagan was 6'1").
It is helpful to keep things simple.
Very often, we will be using theories that focus on one thing at a time. In doing so, we assume that other things (other than what we are focusing on) are not goofing up our testing of the theory we are using. That assumption is called "ceteris paribus," which means "other things being the same."
For example, I may have a theory that my dog will come to me if I call her name. I may want to throw in that she will come to me when I call her name, ceteris paribus. That changes things a bit, because now I expect her to come to me only if other things are not going on, such as someone else calling her at the same time. My theory still says that she will respond to her name, but also admits that she may respond to other things as well. In some ways, adding the ceteris paribus bit weakens my prediction about her behavior, but in another way, it makes it more applicable to reality. It also reminds me that I need to look for things that are distracting her if I am testing my theory by calling her, but she does not come right away. If I can figure out what the other things are that could be distracting her, I might be able to come up with an even better theory, but one that reduces to the simple "if I call her, she will come" version when other things are not happening.