Methods of Analysis
Unit 3: Economic Analysis
Micro vs. Macro
the two most general fields of study in economics:
microeconomics – the study of the economy at the level of the individual; the choices
made by individual producers and consumers
macroeconomics – the study of the economy as a whole; how the sum of all the
individual choices come together
Positive vs. Normative
whether studying micro or macro, economists conduct two different types of analysis:
positive analysis – description of the economy as it is; free of value judgements
normative analysis – description of the economy as it ought to be
micro and macro describe what is being studied while positive and normative describe
how it is being studied
Marginal Analysis
economists most often conduct marginal analysis, because they assume people
exercise rational self-interest at the margins
marginal analysis – analyzing the last or incremental choice that is made
rational self-interest – using reason to choose that which makes you better off
the concept of rational self-interest is dependent on the information available and
the unique wants and needs of individuals…it is subjective
people will rationally choose the option which gives them the most satisfaction given
the information they have based on their wants and needs at the time
people are self-interested, not selfish
see airline PowerPoint example
Common Mistakes
fallacy of composition – assuming that what is good for an individual is therefore
good for the entire economy
association as causation – assuming that correlation implies causation