Economics Chapter Seven
Positive and Normative Analysis
These are key distinctions used in economics and policy evaluation.
Positive Analysis describes how the world is and what is happening. It explains
why something is happening and predicts what will happen. Positive Analysis is
based on facts and is objective. An example is when a policy is being set/
adopted. Positive Analysis develops such questions as: What is going to happen
if such policy is adopted? Another example is this: An increase in minimum wage
leads to higher unemployment among young workers.
Normative Analysis describes how the world should be, it prescribes what
should happen which includes value judgment. Normative Analysis is subjective,
and value based. It looks at which outcome would be better and what policy
should be adopted. An example for this is: The government should increase
minimum wage to ensure a living wage for all.
To sum it all up, the Positive Analysis tells us what is happening, and the
Normative Analysis tells us what should happen. With the second Analysis,
people are being considered when a policy is being adopted or when is should be
adopted. On the other hand, the Positive Analysis tells us what is happening after
the policy has been adopted. This means it happened without the consideration
of others, in other words, it does not involve value judgment while Normative
Analysis does.
Efficiency
Efficiency is maximising the size of the economic pie. It is a way of evaluating
policies; how they affect people’s welfare or wellbeing. Economic efficiency
describes an outcome as more economically efficient if it results to more
economic surplus. Economic Surplus is the difference between total
benefits and total costs. This flows from the decision made by one and
measures how that decision affected your wellbeing. Efficiency outcome
results in the largest economic surplus. While Economic Surplus measures the
economic pie, Efficiency outcome results in that economic pie.
Efficiency and Equity
Not everyone is happy with an efficient outcome; policies chosen by the
government helps others and harms others. The ones that are harmed are not
happy, here is an example: The laws that allow Uber to operate in cities raise
economic surplus because the benefits to Uber drivers and passengers outweigh
the harm suffered by taxi drivers. The taxi drivers are the unhappy ones. An
efficient outcome has the ability to make everyone happy. Equity measures
fairness.
Measuring Economic Surplus
Consumer Surplus
This is the economic surplus one gets from buying something. Its equation goes
like this: Consumer Surplus= marginal benefit – price. Marginal Benefit is
the price that one wants to pay willingly for a product. Price is the actual cost of
the product that one wants to buy. Consumer surplus is the gain from buying
something at a price that is lower than the price one is willing to pay.
, Scenario: There’s a sweater that you like and are willing to pay for it. Say that
you are willing to pay R40 for it, and the price tag says that it is R35. The price is
essentially lower than the price you were willing to pay. Consumer surplus is then
R40-R35=R5. The R5 is your consumer surplus, this is what you gained from
buying the sweater.
Consumer Surplus and Rational Rule for Buyers
Rational Rule for buyers says one should keep buying something until the
marginal benefit of the last units you bought equals to the price of that unit.
Here is a Scenario: You want to buy socks, and the price is R1,00 per pair. This
is what you are willing to pay:
R3,00 for the first pair – You should buy the pair for it is bigger than the price and
your surplus is R2,00
You keep buying until the price you are willing to pay equals to the
original price of the product.
Ultimately, you earn surplus on all your purchases until the last one which equals
to the price.
CONSUMER SURPLUS GRAPH IS DRAWN ON EXERCISE BOOK
Producer Surplus
This is the economic surplus of someone selling things. The equation goes like
this: Producer surplus = Price – marginal cost
Marginal cost is the extra cost from an additional unit to produce something.
Producer surplus is what one gains when they sell something and the price, they
were willing to receive is above the marginal cost you incurred from producing a
certain product. This scenario explains everything: The student you are tutoring
asks for another hour of your time. What is the marginal cost of providing your
services for another hour? What is it that you give up in order to fit in the
student? What is going to cost you to spend another hour with this student? You
tell the student that you at least need another R25 for an extra hour. But the
student is willing to pay R35 for it. The producer surplus is then R25-
R35=R10. The R10 is the producer surplus.
Important information: Willing to pay does not mean that someone wants
to pay a certain amount. Also, marginal cost can be described as the minimum
supply price [that is in supply]. But, in demand, we can also go as far as saying
that the original price of a product the minimum/lowest demand price. Rational
Rule for sellers goes like this: Keep selling until the marginals cost equals to
the price.
PRODUCER SURPLUS GRAPH IS DRAWN ON EXERCISE BOOK
Voluntary Exchange
Buyers and sellers exchange money for goods if they both want to. Trading is a
win-win situation that creates both producer and consumer surplus. Both buyers
and sellers gain from the trade. Though, voluntary exchange does not guarantee
if both buyers and sellers share equally in the gains from the trade. Here’s a
Positive and Normative Analysis
These are key distinctions used in economics and policy evaluation.
Positive Analysis describes how the world is and what is happening. It explains
why something is happening and predicts what will happen. Positive Analysis is
based on facts and is objective. An example is when a policy is being set/
adopted. Positive Analysis develops such questions as: What is going to happen
if such policy is adopted? Another example is this: An increase in minimum wage
leads to higher unemployment among young workers.
Normative Analysis describes how the world should be, it prescribes what
should happen which includes value judgment. Normative Analysis is subjective,
and value based. It looks at which outcome would be better and what policy
should be adopted. An example for this is: The government should increase
minimum wage to ensure a living wage for all.
To sum it all up, the Positive Analysis tells us what is happening, and the
Normative Analysis tells us what should happen. With the second Analysis,
people are being considered when a policy is being adopted or when is should be
adopted. On the other hand, the Positive Analysis tells us what is happening after
the policy has been adopted. This means it happened without the consideration
of others, in other words, it does not involve value judgment while Normative
Analysis does.
Efficiency
Efficiency is maximising the size of the economic pie. It is a way of evaluating
policies; how they affect people’s welfare or wellbeing. Economic efficiency
describes an outcome as more economically efficient if it results to more
economic surplus. Economic Surplus is the difference between total
benefits and total costs. This flows from the decision made by one and
measures how that decision affected your wellbeing. Efficiency outcome
results in the largest economic surplus. While Economic Surplus measures the
economic pie, Efficiency outcome results in that economic pie.
Efficiency and Equity
Not everyone is happy with an efficient outcome; policies chosen by the
government helps others and harms others. The ones that are harmed are not
happy, here is an example: The laws that allow Uber to operate in cities raise
economic surplus because the benefits to Uber drivers and passengers outweigh
the harm suffered by taxi drivers. The taxi drivers are the unhappy ones. An
efficient outcome has the ability to make everyone happy. Equity measures
fairness.
Measuring Economic Surplus
Consumer Surplus
This is the economic surplus one gets from buying something. Its equation goes
like this: Consumer Surplus= marginal benefit – price. Marginal Benefit is
the price that one wants to pay willingly for a product. Price is the actual cost of
the product that one wants to buy. Consumer surplus is the gain from buying
something at a price that is lower than the price one is willing to pay.
, Scenario: There’s a sweater that you like and are willing to pay for it. Say that
you are willing to pay R40 for it, and the price tag says that it is R35. The price is
essentially lower than the price you were willing to pay. Consumer surplus is then
R40-R35=R5. The R5 is your consumer surplus, this is what you gained from
buying the sweater.
Consumer Surplus and Rational Rule for Buyers
Rational Rule for buyers says one should keep buying something until the
marginal benefit of the last units you bought equals to the price of that unit.
Here is a Scenario: You want to buy socks, and the price is R1,00 per pair. This
is what you are willing to pay:
R3,00 for the first pair – You should buy the pair for it is bigger than the price and
your surplus is R2,00
You keep buying until the price you are willing to pay equals to the
original price of the product.
Ultimately, you earn surplus on all your purchases until the last one which equals
to the price.
CONSUMER SURPLUS GRAPH IS DRAWN ON EXERCISE BOOK
Producer Surplus
This is the economic surplus of someone selling things. The equation goes like
this: Producer surplus = Price – marginal cost
Marginal cost is the extra cost from an additional unit to produce something.
Producer surplus is what one gains when they sell something and the price, they
were willing to receive is above the marginal cost you incurred from producing a
certain product. This scenario explains everything: The student you are tutoring
asks for another hour of your time. What is the marginal cost of providing your
services for another hour? What is it that you give up in order to fit in the
student? What is going to cost you to spend another hour with this student? You
tell the student that you at least need another R25 for an extra hour. But the
student is willing to pay R35 for it. The producer surplus is then R25-
R35=R10. The R10 is the producer surplus.
Important information: Willing to pay does not mean that someone wants
to pay a certain amount. Also, marginal cost can be described as the minimum
supply price [that is in supply]. But, in demand, we can also go as far as saying
that the original price of a product the minimum/lowest demand price. Rational
Rule for sellers goes like this: Keep selling until the marginals cost equals to
the price.
PRODUCER SURPLUS GRAPH IS DRAWN ON EXERCISE BOOK
Voluntary Exchange
Buyers and sellers exchange money for goods if they both want to. Trading is a
win-win situation that creates both producer and consumer surplus. Both buyers
and sellers gain from the trade. Though, voluntary exchange does not guarantee
if both buyers and sellers share equally in the gains from the trade. Here’s a
