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1.1: Normative and Positive Theories
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- How is economics used?
- What is an economic theory?
- What is a market?
- A positive analysis, analogous to the study of electromagnetism or molecular biology, involves only the attempt to understand the world around us without value judgments.
- Economic analyses employing value judgments are known as normative analyses. When everyone is made better off by a change, recommending that change is relatively uncontroversial.
- A cost-benefit analysis totals the gains and losses to different individuals in dollars and suggests carrying out changes that provide greater benefits than harm. A cost-benefit analysis is a normative analysis.
- Welfare analysis posits social preferences and goals, permitting an optimization approach to social choice. Welfare analysis is normative.
- Economics helps inform society about the consequences of decisions, but the valuation of those decisions is a matter for society to choose.