1.4 Positive Economic Theory and Analysis
It will be noticed that value judgments and normative
elements are unavoidable in economic discussions. Yet economists
and researchers take the effort of preserving and developing the
scientific content of the subject matter. There is a standard theoretical
model generally used and improved upon in most analytical work.
This model emerges out of neo-classical techniques introduced at
the beginning of this century. Professor Danie M. Hausman in his
recent book Inexact and Separate Science of Economics has
brought out several basic features of this theoretical model.
The important features are :
(A) Marginal Approach: The standard theoretical
model used in economics is also called a marginal method or approach.
This is because all optimizing decisions are taken ’at the margin’
under this method. Margin or marginal change means infinitesimally
small changes in an economic entity under consideration, such as
utility, cost, factor services, wage rate, quantity demanded or
supplied, etc. Such a small or marginal change is in fact a mathematical
tool used in calculus. In mathematics, the first derivative of any
algebraic function is known as ’the rate of change.’ In economics,
marginal value or quality serves exactly the same purpose. This
can be illustrated as:
In each case marginal value indicates the rate of change. With
a small variation in the quantity of x, the marginal utility changes
at the rate of 2, or with a small change in the quantity of x, marginal
revenue changes at the rate of 0.75. In both these examples, the
sign of the marginal values is positive. Therefore both marginal
utility and marginal revenue tend to increase with every increase
in the quantity of x. This however need not always be the case.
In the present case, the functions are said to be rising.
But there may be falling functions as well, such as that of the
cost of production in the initial stages. In that case, value of
the marginal cost may be negative. In fact, productive activity
normally and beneficially occurs on the falling phase of the average
cost curve. This will get clearer as we proceed.
(B)Ceteris Paribus (restrictive) clause : The
marginal method of economic analysis deals with the rate of small
changes. Moreover, these are instant and isolated changes. We need
to concentrate on the effect of such changes on concerned individuals.
But actually, economic activity is highly complex and consists of
interdependent factors. Therefore such isolated changes can
be examined only under highly restricted conditions. We have to
make a heroic assumption about the constancy or absence of change
in all other related factors or causes. For instance, an individual’s
demand for a commodity depends on several conditions such as the
price of the commodity (P), prices of its substitutes
(Ps), income of the individual (Y), the number of members
in his family (N) and the tastes of that individual (Z).
Such a relation can be expressed in a functional form as :
d = f (P, Ps, Y, N, Z).
This explains that ’d’, the quantity of a commodity
demanded, functionally depends upon five different factors. In other
words, any change in any one of these factors can result in a change
in the quantity demanded. However, the marginal approach is partial
in nature. It attempts to concentrate on any one of these factors
at a time, in analyzing its effect. The rest of the factors are
assumed to be constant. This is the implication of the
Ceteris Paribus a condition which means ’other things
remaining equal.’ If we want to concentrate on the isolated
effect of changes in the price of the same good (P) on the quantity
demanded, then this can be written as :
d = f (P) [Ps, Y, N, Z]const.
Here the second bracket, i.e. […], serves as a
Ceteris Paribus assumption in explaining the price-demand
1.1 Definition and Nature
1.2 Macro and Microeconomics
1.3 Positive and Normative Science
1.4 Positive Economic Theory And Analysis