In your own words: a. Describe by example the concepts of positive vs. normative
ID: 1143508 • Letter: I
Question
In your own words:
a. Describe by example the concepts of positive vs. normative economics
b. Explain how a production possibilities curve is useful in the study of economics
c. If you were to describe the demand curve and the supply curve intersection to another student what six sentences would you use to do so?
d. What is the difference between a point on the curve vs. the curve moving to the left or the right...use either supply or demand
Remember to use your own words and any examples you think would help!
Explanation / Answer
a.
Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved.
While this distinction seems simple, it is not always easy to differentiate between the positive and the normative. Many widely-accepted statements that people hold as fact are actually value based.
For example, the statement, "government should provide basic healthcare to all citizens" is a normative economic statement. There is no way to prove whether government "should" provide healthcare; this statement is based on opinions about the role of government in individuals' lives, the importance of healthcare and who should pay for it.
The statement, "government-provided healthcare increases public expenditures" is a positive economic statement, because it can be proved or disproved by examining healthcare spending data in countries like Canada andBritain where the government provides healthcare.
Disagreements over public policies typically revolve around normative economic statements, and the disagreements persist because neither side can prove that it is correct or that its opponent is incorrect. A clear understanding of the difference between positive and normative economicsshould lead to better policy making, if policies are made based on facts (positive economics), not opinions (normative economics). Nonetheless, numerous policies on issues ranging from international trade to welfare are at least partially based on normative economics.
b.
Its axes each show a product that is produced within the economy, and the production possibility curve shows you how much of each is being produced. In order to produce more of a product, more of the other product will have to be given up. In other words, it shows you the opportunity cost.
To solve our economic problems, it can help us to see what products are most beneficial to the economy at the moment and what we have to give up in order to produce more of that.
c.
it is not so much that supply and demand curve intersect at the equilibrium point. Equilibrium is a consequence of where the supply and demand curves meet. Bear with me, but its best to think of supply and demand as two separate functions and equilibrium as the result of the choices people make.
A quick refresher first. Remember the law of demand, when the price of a good rises the quantity demanded falls. This is what gives the demand curve its negative slope - at a higher price someone will want less. That makes sense. Think of the demand curve as a line of people standing outside a Porsche dealership with a wad cash each is willing to spend on a new 911 turbo. The first guy in line is willing to pay a lot for a car while the last guy in line will only pay pennies.
As for supply curve, in general, it represents the cumulative effort to bring that good or service to fruition. At a higher price, the more willing someone is to provide their time and resources to produce the thing demanded. For example, it takes 2 tons of steel to produce a Porsche 911 turbo, 4 tons for two cars, 6 tons for 3 cars, 8 tons for 4 cars, and so on. This is why the supply curve is upward sloping. Suppliers will be willing to supply more at a higher price.
So back to the dealership and to the important question - Where do sellers stop selling and buyers stop buying? Its clear where both parties should start buying and selling. The first guy in line is willing to pay a lot for a car and the supplier can provide the car for less than the buyer is willing to pay. They both win. This process continues until the cost of the car is equal to price someone is willing to pay. Beyond this point, if another car were produced and sold, the next guy in line would be willing to pay less then the cost to the supplier.
The point at which the value to the consumer is equal to the supplier is called equilibrium. Equilibrium is more hypothetical than real. Equilibrium a consequence of people's choices, scarcity, and opportunity cost and will constantly fluctuate. It is not something fixed that people work towards.
d.
The demand curve is a graph used in economics to illustrate how much of a product or service will be bought at any price. There are two types of demand curves: individual curves, which count how much an individual consumer will purchase, and market curves, which consist of total market demand. The demand curve is graphed on X and Y axes, where price is listed on the Y axis and quantity sold is on the X axis. The demand curve can either shift entirely or experience movement along part of its curve.
The demand curve shifts when consumers change their perceptions about the worth of a product. If consumers decide they are willing to pay higher prices for a product or want to purchase more of it, the demand curve shifts to the right. The less consumers are willing to pay for a product, the more the demand curve shifts to the left. In other words, heightened perceived worth of a product shifts the demand curve right, while decreased perceived worth shifts the demand curve to the left. Factors that can shift the demand curve either way include changes in consumer expectations for a certain product, changes in discretionary income and changes in trends and what is fashionable.
Unlike shifts in demand curves that are dictated by consumer interest, movement in the demand curve occurs when the price of a product changes. For example, movement can occur if a candy manufacturer raises or lowers the price of a certain type of candy. Altering candy prices could cause consumers to buy more candy or less candy, depending on where the new price is set. The demand curve itself does not move; rather, there is movement along the curve.
The demand for a product or service is relative to how much supply there is. Many business owners look to find the "equilibrium price" for the goods or services they offer. The equilibrium price is the point where the demand curve and the supply curve intersect. The point at which these two curves intersect creates an equilibrium between the quantity that consumers want of a product and the amount of that product that companies desire to sell.