Methods of Economics: First, Definition of Economics as; The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants. This article explains the Methods of Economics; Economic methodology is the study of methods, especially the scientific method, about economics, including principles underlying economic reasoning. The deductive and inductive method involves reasoning from a few fundamental propositions, the truth of which is assumed. Human wants are unlimited, but the means to satisfy the wants are limited. Also learn, What are the Fundamentals of Economics?
Here are explaining and learn, What are the Methods of Economics?
The following Methods of Economics below are;
The Economic Perspective:
- Scarcity and choice: Resources can only use for one purpose at a time. Scarcity requires that choices make. The cost of any good, service, or activity is the value of what must give up to obtain it. As well as, How to explain the Nature of Business Economics?
- Rational Behavior: Rational self-interest entails making decisions to achieve maximum fulfillment of goals. Different preferences and circumstances lead to different choices. Rational self-interest is not the same as selfishness.
- Marginalism – benefits, and costs: Most decisions concern a change in current conditions; therefore the economic perspective is largely focusing on marginal analysis. Each option considered weighs the marginal benefit against the marginal cost. Whether the decision is personal or one made by business or government, the principle is the same. The marginal cost of action should not exceed its marginal benefits. There is “no free lunch” and there can be “too much of a good thing.”
Why Study Economics?
The below are;
- Economics of citizenship: Most political problems have an economic aspect, whether it is balancing the budget, fighting over the tax structure, welfare reform, international trade, or concern for the environment. Both the voters and the elected officials can fulfill their role more effectively if they have an understanding of economic principles.
- Professional and personal applications: The study of economics helps to develop an individual’s analytical skills and allows students to better predict the logical consequences of their actions. Economic principles enable business managers to make more intelligent decisions. Economics can help individuals make better buying decisions, better employment choices, and better financial investments. Economics is, however, mainly an academic, not a vocational subject. Its primary objective is to examine problems and decisions from a social rather than a personal point of view. It is not a series of “how to make money” examples.
Methods of Economics:
Some of the most important methods of economic analysis are as follows:
- Deductive Method, and.
- Inductive Method.
Economic generalizations describe the laws or statements of tendencies in various branches of economics such as production, consumption, exchange, and distribution of income. In the view of Robbins, economic generalizations or laws are statements of uniformities that describe human behavior in the allocation of scarce resources between alternative ends.
The generalizations of economics like the laws of other sciences, state cause and effect relationships between variables and describe those economic hypotheses which have been found consistent with facts or, in other words, are true by empirical evidence. But a distinction may draw between a generalization (law) and a theory.
A law or generalization just describes the relationship between variables; it does not provide any explanation of the described relation. On the other hand, a theory explains the stated relation between the variables, that is, it brings out the logical basis of the generalization. Economic theory or a model derives a generalization through the process of logical reasoning and explains the conditions under which the stated generalization will hold.
The deductive method is known as the analytical abstract a priori method. Here we start with certain formal data and assumptions. Then by logical reasoning, we arrive at certain conclusions. We start with undisputed fundamental facts and after adding some assumptions we build up a theory. For instance, it is assumed that businessmen aim at maximum profit. It follows from this that businessmen buy the materials in the cheapest market and sell them in the dearest market.
In the Deductive method of Economic Analysis, we proceed from the general to the particular. This is also known as a hypothetical method for some of the assumptions that may not correspond to facts, but very near facts which may use as the premise for starting, reasoning and drawing conclusions. In economics, we start with very simple premises and work up gradually or more and more complex hypotheses.
In this method, economists proceed from a practical angle to problems of science to reduce the gulf between theory and practice. Induction is done by two forms, viz. experimentation and statistical form. Facts are collecting first, arrange and conclusions are drawn. Then these general conclusions are further verified concerning facts.
The inductive method is generally associating with the statistical form of inductions. The statistical approach has a larger field in economic investigations than the method of experimentation. Further, the method of statistical induction is indispensable for the formulation of economic policy. Malthus presented his famous theory of population only after studying the facts of the population in various countries; He then used statistics to support his theory. Similarly, Engel, the German statistician employed the inductive method and used statistics to formulate his law of consumption.
The Inductive method can apply in two distinct ways:
- The experimental method, and.
- Statistical method.
Deductive or Inductive?
From the above discussion, we can infer that there is no point in pleading one method against the other. The two methods have to make use of or blended to achieve the required objective. The two methods, deductive and inductive, are not competitive, but complementary helping the investigator. Explain are Economics is a Science and Art?
Just, like any other matter, the issue, whether the deductive method is to refer to the inductive method or vice versa, became a raging controversy in the last century. The classical school of Britain represented by David Ricardo, Malthus, J.S.Mill, N.Senior, etc., strongly advocated deduction and affirmed their support in deductive methodology. On the contrary, the Historical School in Germany represented by Carl Knies, Roscher, Hildebrand, etc., affirmed faith in an inductive method. The controversy over methodology went on until Alfred Marshall brought about a compromise.