Deductive method of reasoning in economics consists of reasoning from the general to the particular. The economist proves that if a law is true for all cases then it must be true for a particular case.

Inductive method draws conclusions from the known facts of economic life e.g. economists examining the sales graph of a good when price is raised or lowered to see if behaves according to the normal law of demand.

Positive statements: something that can be shown to be true or false – by observing real world events. 

A normative statement involves making a value judgement or expression of an opinion about what ought to be true.

Activity 

1. How reliable is the statistic that North Korea’s unemployment rate is 0%
2. How do Economists know what is ‘true’?

Activity: Read the following statements and decide if it is a positive or normative statement.

Needs, wants and resources: We need some things just to stay alive – including water, food and warmth. But our wants are never-ending (infinite).

Resources: used to produce these goods and services are in limited supply (finite). Collectively, resources are called factors of production. Resources can be divided into four groups: Land, Labour, Capital and Enterprise.

HOW ARE ECONOMIC DECISIONS MADE

The Consumer: The individual who makes the decision to buy goods or services for their own personal use.

Assumptions about Consumer Behaviour

1. The consumer aims to gets maximum Satisfaction from that income. A consumer will spend their limited income in such a way that they will achieve the most satisfaction from their money. He will obey the Equi-Marginal Principal of Consumer Behaviour.

2. The consumer has a Limited Income. The consumer’s income is not large enough to satisfy their needs and wants, therefore the consumer must choose between those goods he wishes to buy.

3. The consumer is subject to the law of Diminishing marginal utility. As a consumer consumes additional units of a good their marginal utility for this good will eventually decline.

4. Economic goods: The consumer will only spend his/her income on economic goods.

5. The consumer acts Rationally: The consumer acts in that manner consistent with his preferences. If the person sees an identical commodity priced differently in two adjoining shops they will buy it at the lower price.

WHAT IS AN ECONOMIC GOOD

Is a product or service which commands a price, derives utility and is transferable.

Characteristics of Economic Goods (PUT)

1. It must command a Price: Its supply must be scarce in relation to the demand for it. If not people will not be prepared to pay a price to obtain it.

2. It must provide you with Utility: The good must give you a feeling of satisfaction. Anything which is a nuisance does not and so is not an economic good.

3. It must be Transferable: For an item to be considered an economic good it must be capable of being transferred from one person to another

Examples of Goods which are not Economic Goods

1) Fresh Air: They are plentiful in supply/not scarce – commands no price

2) Weeds: They do not provide you with utility – you are not prepared to pay

3) Beauty/Good Health: They are not capable of being sold. 

Utility Is the amount of satisfaction derived from the consumption of a good. 

Marginal Utility Is the change in satisfaction resulting from consuming an extra unit of a good.

The Law of Diminishing Marginal Utility 

This law states that as a consumer consumes additional units of a good the marginal utility/ extra satisfaction derived from each additional unit consumed will eventually decline.

Assumptions under the Law of Diminishing Marginal Utility

1. Time lapse

Time Lapse between consumption of successive units. Sufficient time has not lapsed between the consumption of successive units.

If a person eats an orange on Monday, one on Thursday and one on Sunday, because of the time which has elapsed between the consumption of each extra orange marginal utility may not diminish.

2. Applies after a certain point called the Origin.

The origin is the minimum quantity of the commodity which can be used effectively and until this stage has been reached, marginal utility may not diminish.

3. ‘Other factors’ affecting utility do not change.

The law is based on the assumption that other factors which may affect a consumer’s utility do not change including income levels, the nature of successive units of the commodity; and the consumer’s taste for the commodity.

4. Addictive Goods & Medicine

It does not apply to Addictive goods. The consumer may gain increasing marginal utility by consuming each additional unit of an addictive good

Sustainable development is defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Social sustainability

Social sustainability is the ability of a social system to operate indefinitely at a defined level of social wellbeing and harmony.

Government support examples of social sustainability:

• Reduced homelessness
• Improved standard of living
• Reduced inequality
• Protect the vulnerable
• Increased minimum wage
• Health equity
• Community development
• Social support
• Human rights
• Labour rights

Environmental sustainability

In a sustainable environment a system would be able to maintain populations, biodiversity and overall functioning over an extended period.

Government examples of env. sustainability:

• Subsidies for electric cars
• Penalties on firms for env. degradation
• Tax breaks for firms who lower CO2
• Funding for R&D in green areas
• Environmental education programmes

Economic sustainability

This is the ability of an economy to support a definite level of economic activity indefinitely. It refers to practices that support long-term economic growth without negatively impacting social, environmental and cultural aspects of the community.

Examples of business economic sustainability:

• Ethical sourcing of raw materials
• Reduced emission in production process
• Transparency in production process
• Reduce waste / recycle