Y1 41) Positive, Normative Statements and Economic Methodology

Summary

This video script explains the nature of economics as a social science, focusing on human behavior and choices. It outlines the process of economic theory development, starting from observing consumer behavior to forming hypotheses and predictions. These are tested against real-world evidence, leading to the acceptance or rejection of theories. The script emphasizes economics as a positive science, favoring testable statements over normative opinions, and discusses the law of demand with examples of gifting and veblen goods.

Takeaways

• 🔬 Economics is a social science that studies human behavior and choices, distinguishing it from natural sciences which focus on the universe.
• 🧐 Theories in economics are developed through observing patterns in human behavior, forming hypotheses, and testing these against real-world evidence.
• 📉 Demand theory is an example of an economic theory that originated from observing how consumer behavior changes with price fluctuations.
• ⬇️ A hypothesis is formed when economists notice that consumers tend to spend more when prices are lower, which is then refined into testable predictions.
• 📋 Economists collect empirical evidence to validate or refute their predictions, ensuring that economic theories are grounded in observable data.
• ❌ If evidence contradicts predictions, the hypothesis is rejected, and economists return to observation to form new hypotheses.
• ✅ When evidence supports predictions, such as the correlation between price drops and increased spending, a hypothesis becomes a theory, like the law of demand.
• 🔄 Theories are continually tested to identify any exceptions or sub-theories, such as Giffen goods or Veblen goods, which are rare but can provide insights into economic behavior.
• 📊 Economics values positive statements that can be tested and proven with evidence, in contrast to normative statements that are based on opinions and cannot be empirically tested.
• 🚫 Normative statements, which include value judgments and opinions, are not favored in economics because they cannot be objectively verified or falsified.

Q & A

What is the primary difference between a natural science and a social science?

Natural science involves observing aspects of the universe and forming theories, while social science focuses on observing human behavior and creating theories around those observations.

Why is economics considered a science?

Economics is considered a science because it involves testing observations and theories through empirical evidence, similar to the scientific method used in natural sciences.

How does an economist form a theory based on the demand theory?

An economist forms a theory by observing consumer behavior patterns, forming a hypothesis, making precise predictions, collecting real-world evidence, and testing these predictions against the evidence.

What is the initial step an economist takes when observing consumer behavior?

The initial step is to form a hypothesis based on observed patterns of consumer behavior, such as the tendency of consumers to spend more when prices are lower.

How do economists test their predictions?

Economists test their predictions by collecting real-world evidence that either supports or contradicts their hypotheses, allowing them to validate or reject their theories.

What happens if the collected evidence does not support the economist's predictions?

If the evidence does not support the predictions, the hypothesis is rejected, and economists return to observing consumer behavior to form new hypotheses.

What is the law of demand in economics?

The law of demand is a theory that states consumers will spend more when prices fall and less when prices rise, based on the evidence supporting the initial hypothesis.

Can there be exceptions to the law of demand?

Yes, there can be exceptions such as Giffen goods, where demand increases as prices rise, or Veblen goods, where demand is driven by high prices as a status symbol.

What is the importance of testing economic theories repeatedly?

Repeating tests ensures the robustness of economic theories and helps identify any exceptions or limitations, leading to a more refined understanding of economic behavior.

Why do economists prefer positive statements over normative statements?

Economists prefer positive statements because they can be tested against factual evidence, unlike normative statements, which are based on opinions and cannot be empirically verified.

What is the role of evidence in establishing economic theories?

Evidence plays a crucial role in economics as it is used to test hypotheses and predictions, allowing for the formation of theories that are based on observable and verifiable real-world data.

Outlines

00:00

📈 Understanding Economics as a Social Science

This paragraph explains the distinction between natural and social sciences, emphasizing that economics falls under the latter as it studies human behavior and choices. The process of economic theory development is outlined, starting from observing consumer behavior to forming hypotheses, making predictions, and testing them against real-world evidence. The paragraph highlights the scientific nature of economics, which involves rigorous testing of theories, and introduces the concept of demand theory as an example. It also touches upon the idea of positive statements in economics, which are testable against evidence, contrasting them with normative statements that are based on opinions and cannot be tested.

05:02

🔍 The Role of Positive and Normative Statements in Economics

The second paragraph delves into the importance of positive statements in economics, which are factual and testable, as opposed to normative statements that express opinions and cannot be empirically verified. It clarifies that economics, as a social science, relies on observable and testable theories about human behavior. The paragraph concludes by reinforcing the idea that economists prefer positive statements because they allow for scientific inquiry and evidence-based conclusions, whereas normative statements are more subjective and do not contribute to the scientific understanding of economic phenomena.

Keywords

💡Economists

Economists are social scientists who study the production, distribution, and consumption of goods and services. In the video, it's mentioned that economists observe human behavior and make theories based on those observations, emphasizing their role in understanding choices humans make and how these choices affect the economy.

💡Natural Science

Natural science refers to the branches of science that explore the natural world and the universe, often through experimentation and observation. The video contrasts natural science with social science, highlighting that while natural scientists observe the universe, economists observe human behavior.

💡Social Science

Social science is the study of human society and social relationships. The video explains that economics falls under social science because it focuses on human behavior and choices, which are central to understanding economic activities and patterns.

💡Observations

Observations are systematic and careful watching or noticing of phenomena. In the context of the video, economists make observations of consumer behavior to identify patterns that can be used to form hypotheses and theories.

💡Theories

Theories in economics are explanations or sets of assumptions that attempt to describe, predict, or understand economic phenomena. The video discusses how theories are developed from observations and tested through predictions and evidence.

💡Hypothesis

A hypothesis is a proposed explanation or assumption made on the basis of limited evidence as a starting point for further investigation. The video script uses the example of demand theory, where economists form a hypothesis that when prices are low, consumers spend more.

💡Predictions

Predictions are statements about what is expected to happen or be discovered in the future. In economics, predictions are derived from hypotheses and are testable against real-world evidence, as illustrated in the video with the prediction that consumers will spend more when prices fall.

💡Evidence

Evidence in the context of economics refers to the data or information collected to support or refute a hypothesis or theory. The video emphasizes the importance of collecting evidence to test economic theories, which is a key aspect of making economics a science.

💡Demand Theory

Demand theory is a fundamental concept in economics that describes the relationship between the quantity of a product that consumers are willing and able to purchase and its price. The video uses this theory to illustrate how economists observe, form hypotheses, make predictions, and collect evidence.

💡Positive Statements

Positive statements in economics are objective assertions that can be tested against real-world evidence. The video contrasts these with normative statements, which are subjective and opinion-based. Positive statements are crucial for the scientific nature of economics as they allow for empirical testing.

💡Normative Statements

Normative statements express opinions or value judgments and are subjective. The video explains that economists prefer positive statements because they can be tested with evidence, unlike normative statements which are based on personal beliefs and cannot be empirically verified.

💡Gifting Goods Theory

Gifting goods theory is a concept mentioned in the video where the demand for certain goods increases as prices rise because consumers view them as gifts or status symbols. This is an exception to the general law of demand and is discovered through further testing and observation.

💡Veblen Goods

Veblen goods, also known as conspicuous goods, are luxury items for which demand increases as prices rise. This concept is introduced in the video as an exception to the law of demand, illustrating how economic theories can have nuances and exceptions.

Highlights

Economics is distinguished from natural science by focusing on human behavior and choices.

Economics is a social science that tests observations and theories, similar to a natural science.

Demand theory is used as an example to explain how economic theories are formed.

Economists observe consumer behavior patterns to form hypotheses.

Hypotheses are developed into testable predictions about consumer spending.

Economists collect real-world evidence to test their predictions.

If evidence supports predictions, a hypothesis can become a theory, like the law of demand.

Theories are continually tested to ensure their validity and to identify any exceptions.

Exceptions to the law of demand, such as giffen goods, are identified through further testing.

Veblen goods are a rare exception where demand increases as prices rise due to status symbolism.

Economics is a positive subject, with theories tested against factual evidence.

Economists prefer positive statements that can be tested over normative statements based on opinions.

Normative statements are opinion-based and cannot be tested, unlike positive statements.

The process of economic theory formation involves observation, hypothesis, prediction, evidence collection, and theory testing.

Economic theories are not static and are refined through continuous observation and testing.

The video emphasizes the scientific nature of economics and the importance of evidence-based theories.

Transcripts

hi everybody what do economists actually

do well to understand that we first need

to make a distinction between a natural

science and a social science and natural

science is when scientists observe

aspects of the universe and form

theories around their observations

whereas a social science is when

observations are made of human behavior

and theories are then made around those

observations so social science is very

much focused on the study of human

behavior which is what economics is

economics is a study of human behavior

and choices that humans make theories

are then made based on the observations

that economists will see in the real

world but crucially it's still a science

is economics it's a science because we

test all of our observations we test all

of our theories so it's still correct to

say that economics is a science but it's

a social science not a natural science

because we study human behavior

so how can an economist actually come

out with a theory well let's understand

a basic process of how an economist

comes

comes out with a theory in the context

of demand theory

so we know that demand theory is an

actual theory how can it come about well

the first thing that would happen is

economists would observe some

interesting patterns of consumer

behavior for example economists

generally notice that when prices are

lower consumers spend more that's a very

interesting pattern of behavior from

that an economist will form a hypothesis

of how consumers spend so generally an

economist will form a hypothesis an

expectation that when prices are low

consumers spend more money

from that and economies reform more

precise predictions predictions that can

be clearly tested against evidence so

predictions could be that when prices

fall something that can be tested right

when prices fall consumers spend more

whereas in prices rise consumers spend

less these predictions can be clearly

tested but they are formed from the

hypothesis

then economists will go into the real

world and collect evidence evidence that

will either back up the predictions made

or that will falsify the predictions

made the evidence is there to test the

predictions see how economics clearly is

a science because we collect evidence to

test our predictions and therefore to

test whether theories will hold or not

so once the evidence has been collected

from real world observations careful

real world study of consumer behavior

and the evidence collected will either

back up the predictions or not so the

evidence doesn't back up the prediction

so the evidence goes against the

predictions the hypothesis is rejected

and economists go back to square one and

we start again by observing different

consumer patterns different kinds of

consumer behaviors however if the

evidence collected backs up the

predictions i.e it supports the idea

that when prices rise consumers spend

less whereas when prices fall consumers

spend more

then we have the basis of a theory our

hypothesis becomes a theory and that

becomes the law of demand demand theory

there what then happens is that this

theory gets tested even more and more

and more to make sure there are no

chinks in it if there are any chinks i.e

if there are any times where this theory

doesn't always hold then there can be

sub-theories or there can be slight

exceptions to the theory such as gifting

good theory or deviling good theory

giving good theory the idea that when

prices go up consumers buy more because

they switch their income away from

buying other things towards buying this

good or service that's a very unique

idea and that only happens rarely but

that can be an exception to the law of

demand but we can only get that

strengthening of the theory of law of

demand when we further test the theory

and we see that in some cases this

theory doesn't always hold we also get

the idea of babbling good theory the

idea that there are certain real

luxurious goods that consumers only want

to buy when prices are really high

because they're in a status whereby they

feel great because they are the only

people that have an income that can

afford these really ostentatious or

luxurious goods so the idea that when

prices get really high actually demand

can increase because certain consumers

come in and they want that

of you know the fact that they can

actually afford that that's a vetling

good idea but again very rare

circumstance that happens we can get the

idea of gifting goods and beveling goods

only when we further test the basic idea

of demand theory

so that's basically how a theory can

come about in economics but crucially

it's very obvious to see here that

economics is a science economics is a

positive subject all of our theories all

of our observations all of our

hypotheses all of our predictions are

tested against evidence factual evidence

collected from the real world that makes

it a positive subject

where it can be tested all theories can

be tested for that reason in economics

we like positive statements we like to

make arguments we like to say things

that can be backed up or that can be

falsified from evidence

very very important idea in economics

the idea of positive statements we do

not like normative statements which are

opinionated things what are called value

judgments normative statements are often

statements which have the words like you

know should or ought to or it's fair you

know these are normative statements so

it's unfair there are people that live

in poverty it's unfair that the

government is taxing cigarettes the

government should look to subsidize the

production of healthy food these are all

opinions and the problem with opinions

is they can't be tested so it's very

hard for economists to do anything with

opinions whereas positive statements can

always be tested against the facts

against evidence we like those in

economics we can actually do stuff with

those we can study

we can study that a lot more because we

can test them so always bear in mind

that economics is a social science we

observe human behavior

we come up with hypotheses predictions

and theories that can be tested against

real world evidence which means that we

are a positive science we do not like

normative statements thank you very much

guys for watching i'll see you all in

the next video