Normative economics is the study of what the goals of the economy should be. Positive economics is the study of what is, and how the economy works .
It explores the pure theory of economics, and it discovers agreed-upon empirical regularities.
These empirical regularities are often called empirical facts—for example, large price fluctuations in financial markets tend to be followed by additional large price fluctuations. The three coordination problems any economy must solve are what to produce, how to produce it, and for whom to produce it. In solving these problems, societies have found that there is a problem of scarcity.
• Deduction begins with almost self-evident principles and develops models and conclusions based on those principles. Induction looks at empirical evidence first and infers principles from those observations. Abduction is a combination of deduction and induction.
• Economic reasoning structures all questions in a cost/benefit framework: If the marginal benefits of doing something exceed the marginal costs, do it. If the marginal costs exceed the marginal benefits, don’t do it.
• Sunk costs are not relevant in the economic decision rule.
• The opportunity cost of undertaking an activity is the benefit you might have gained from choosing the next-best alternative.
Summary
• “There ain’t no such thing as a free lunch” (TANSTAAFL) embodies the opportunity cost concept.
• Economic forces, the forces of scarcity, are always working. Market forces, which ration by changingprices, are not always allowed to work.
• Economic reality is controlled and directed by three types of forces: economic forces, political forces, and social forces.
• Under certain conditions, the market, through its price mechanism, will allocate scarce resources efficiently.
• Economics can be divided into microeconomics and macroeconomics. Microeconomics is the study