Positive and Normal Economics

Positive Economics deals with what the economy is actually like. It focuses on facts and avoids value judgments. It tries
to establish scientific statement about economic behavior. It is concerned with “what is”.
The statement, "government-provided healthcare increases public expenditures" is a positive economic statement,
because it can be either be proven or not by examining healthcare spending data in countries like Canada and Britain
where the government provides healthcare.
Normative Economics involves value judgment about what the economy should be like or what particular policy actions
should be like or what particular policy actions should be recommended to get it to be that way. Thus, it embodies
subjective feelings about “what ought to be”.
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.
Economics: Employment and Efficiency
By full employment, we mean the use of all available resources. No workers should be involuntarily out of work;
the economy should provide employment for all who are willing and able to work.
By full production, we mean that all employed resources should be used so that they provide the maximum
possible satisfaction of our material wants. Full production implies two kinds of efficiency – productive and allocative
efficiency.
Productive efficiency is the production of any particular mix of goods and services in the least costly way
Allocative efficiency is the production of that particular mix of goods and
Production Possibility Frontier
The production possibility frontier shows the varying amounts of two types of output that can be produced in
relation to that can be produced by the fixed amount of resources.
Factor that affects the majority.

Table 2. ALTERNATIVE ECONOMIC SYSTEMS

System Characteristics
Production: The means of production (farm factories, stores, natural resources)
are, with few exceptions, owned by private individuals and firms that produce for
a profit. Resource allocation and production methods are determined by market
forces.
Capitalism
(Free Enterprise) Income Distribution: Income to labor and other factors are determined in factor
markets. Labor union often play a role in negotiations between employees and
employers. Income distribution is also affected by taxation and other government
policies.

Government: Democratically elected. Regulates industries to a limited extent

and acts to stabilize economy, but does not engage in comprehensive planning.
Government provides som e public services and income security.

Leading examples: United States, Japan

Production: The means of production are virtually all in the hands of the
government. Allocation and pricing decisions are made by central planning
authority
State Socialism
(Communism, Income Distribution: Money income, with minor exceptions, is all from wage
Authoritarian and salaries set by the government. There are free unions. Incomes are supposed
Socialism) to be relatively equal, but government and ruling party officials have benefits and
privileges that raise their real income far above of the workers.

Government: Self-perpetuating government by the ruling party. Close direction

of all economic activities. Government provides extensive public services and
 income security.

Leading examples: Soviet Union before perestroika, China

Production: The basic means of production are owned and operated by the
government, except family farms, services, businesses, and small production
enterprises. Major allocation decisions are made by the central authorities, while
production methods and the mixture of consumer goods are left to market
Market Socialism determination.
(Regulated Market
Economy) Income Distribution: Income incentives are provided by the market, but real
income is determined by government wage policies, taxation, subsidies, and
public services. Sometimes labor unions are able to force policy changes by
striking.

Government: Market socialist governments until recently have been

authoritarian, but some have turned to democratic elections while maintaining a
market socialist system. Government provides extensive public services and
income security.

Leading examples: Hungary

Production: The means of production are predominantly in private hands, except
for a few basic industries. Pricing allocation, and production methods are mainly
determined by market forces. The government may intervene for specific
Welfare States objectives.
(Democratic
Socialism) Income Distribution: Money incomes are determined by market forces, with
strong labor unions playing a large part in the process. Real after-tax incomes are
quite egalitarian as a result of government taxation, income transfers, and social
services.

Government: Democratically elected. Engages in planning for industrial

development and stability, implemented by industry regulations and economic
incentives. Government provides extensive public services and income security.

Leading examples: Great Britain, Sweden.

The Circular Flow Model

The circular flow model provides a picture of how a free market system operates. The upper half of the diagram
portrays the resource market. Here, households own all the economic resources, supply these resources to businesses.
Businesses, of course, will demand resources because they are the means by which firms produce goods and services. The
coming together of demand and supply for the immense variety of property and human resources establishes the price of
each. The payments, which businesses make in obtaining resources, are costs to businesses but simultaneously constitute
flows of wage, rent, interest and profit income to the households supplying these resources.

The Capitalist Ideology

In order for capitalism or the market system to work, there are certain factors to be considered:

Characteristics of market economy/capitalism

Private property. Private property refers to the exclusive right of a person to buy, keep, use and sell or give away
things of value. If a person owns a piece of land, he may use it for growing crops, recreational area or putting up a
building. He may lease it or sell it. The owner of a private property has the power and the right to decide the purpose and
the manner on which he will use his property for production. The right of private property, coupled with freedom to
negotiate binding legal contracts allows private persons or businesses to obtain, control, employ and dispose of property
resources. The right to bequeath (right to private property) the right of the property owner to designate the recipient of
this property at the time of death - sustains the institution of private property.
 Freedom of enterprise. Capitalism encourages people to go into business. Anyone has the freedom to make a
living. Freedom of enterprise means that private businesses are free to obtain economic resources, to organize these
resources in the production of goods and services of the firm’s own choosing, and to sell them in the market of their
choice. A person may put up his own business, form a partnership or join a corporation.

Freedom of choice means that owners can employ or dispose of their property and money as they see fit. It also
means that workers are free to enter any lines of work of which they are qualified.

Self-interest. The primary driving force of capitalism is self-interest. Each economic unit attempts what is best
for itself. Entrepreneurs aim to maximize their firm’s profit or minimize losses in adverse condition. Property owners
attempt to get the highest price for the sale or rent of their resources. Workers attempt to maximize their utility by finding
jobs which offer the best combination of wages, fringe benefits or working conditions. Consumers seek to obtain the
lowest possible price in purchasing a product.

Competition. Competition is an important aspect in capitalism. Sellers of a particular product compete to gain
the consumer’s money; employers compete to get the best workers; and employees and job seekers compete with one
another to get the job with the highest salary.

Markets and Prices. The market system is the basic coordinating mechanism of a capitalistic economy. Just as
competition is the controlling mechanism, a system of markets is the basic organizing force. The prices are guideposts on
which resource owners, entrepreneurs and consumers make and revise their free choices as they pursue self-interests.

Limited Government. There is little need for governmental intervention in the operation of a capitalistic
economy beyond its role of imposing broad limits on the exercise of individual choices and the use of private property.
The concept of pure capitalism as a self-regulating and self-adjusting economy precludes any extensive economic role for
government.