ECONOMIC ANALYSIS

ECONOMMIC ANALYSIS

It is a systematic approach to determining the optimum use of scarce resources, involving comparison of two or more alternatives in achieving a specific objectives under the given assumptions and constraints. Economic analysis provides insight into how markets operate and offer methods for attempting to predict future individual and market behavior in response to events, trends, and cycle. In economics analysis, there are various techniques, methods, procedures and reasoning which are adopted and followed by the economic thinkers and analyzers, in order to arrive at their theories, facts and opinions. They are;

Ø Scientific Method

Ø Positive vs. Normative economics

Ø Deductive vs. Inductive reasoning

1.5.1 Scientific Method

Economic as a science, follows the scientific method in order to study data, observe patterns and predict results.

Ø The scientific method involves identifying a problem, gathering information, forming a hypothesis, testing the hypothesis, and analyzing the result.

Ø A hypothesis is a simple prediction or opinion which is derived from an observation.

Ø After analyzing the result, when proven to be true with the hypothesis formed the hypothesis become a theory and principle but if it doesn’t relate with the hypothesis, extensive testing and observation is required because the outcome must be obtained more than once in order to be valid.

Ø If the theory or principle becomes generally acceptable as universally true, it becomes a law.

Ø The Scientific method provides the framework necessary for the progression of economic study.

1.5.2 Positive vs. Normative economics

Positive economics is objective and fact based statement that can be tested, proved or rejected by referring to available evidence. It is defined as the “what is” of economics. It is a branch of economics that focuses on the description and explanation of facts, theories and phenomena as well as their relationships. As a science, positive economics focuses on analyzing human behavior. Examples of positive economics statement are;

Ø An Increase in supply of money will lead to inflation.

Ø Increase in Price will result in the decrease in quantity demanded.

Ø A rise in Income will Increase the demand for necessity goods and reduce that of inferior goods.

Ø A reduction in Income tax will improve the incentives of employed to find paid work.

Ø Lastly, Decrease in supply will result in the decrease in quantity supplied.

All these examples listed above when proven, result to be true. It can be tested and proved.

Normative economics on the other hand is an opinion based statement, so they cannot be proved.  It is an aspect of economics that expresses value or normative judgment about economic fairness. It focuses on what the outcome of economic goals should be. So it is seen as been value free. It is defined as the “what should be” and “what ought to be” in economics. “For example, the price of milk should be reduced in order to curb inflation.” It is not certain that if the price of milk is reduced, inflation will drop; it is just an expressed opinion. It is a subjective statement.

1.5.3 Deductive vs. Inductive method

An economic theory derives generalizations or laws through two methods;

Ø Deductive method

Ø Inductive method

During the scientific process, deductive reasoning is used to reach a logical true conclusion. Another type of reasoning inductive is also used. Often, both are interchanged and used confusedly. It is important to learn the meaning of each type of reasoning so that the roper logic can be illustrated and identified.

Deductive reasoning or deduction begins with a general statement or hypothesis and examines the possibilities to reach a specific or logical conclusion (theory). The scientific methods use deduction to test hypotheses and theories. We go from the general statement/ generalization »»»»the theory »»»»to the specific (the observation). In deductions, if something is true in generalization, the same will also be applied to the specific. For example, the price of yam flour has increased in all the markets in Nigeria, the same should be applied to yaba market.

Inductive reasoning is the opposite of deductive reasoning. In Inductive reasoning, we go from specific to general. For example if there is an increase in price of yam in yaba market, the same would form a generalization in Nigeria market at large

Article posted by: Monday Desmond