4. Economic methodology and microeconomic models

In simple words scientific method means that we have to occupy next stages: I. observe a phenomenon,II. make simplifying assumptions and formulate a hypothesis, III. generate predictions, and

IV. test the hypothesis.

Purpose – to explain the reasons underlying observed economic phenomena. A model is a description of the interdependencies in terms of mathematics, pictures, a computer programming language, together with theory of the dynamics of the subsystems.

The essential components of a microeconomic model:

– The economic actors. At the heart of the model is the economic actor or agent – someone or something that is taking economic decisions. It is common practice to speak as though this entity is just an isolated person. Often the same principles apply whether this actor is considered to be an isolated consumer, a worker, a representative member of a group or the embodiment of a corporation.

- Motivation (most microeconomic models assume that somewhere deep in the mechanism is the driving force of self-interest.)

– The economic environment. The economic environment may take a variety of forms. The market itself could be represented in a number of ways: obviously it consists of a collection of other economic actors, but in order to complete its description as the economic environment we need to specify the “rules of the game”.

– Assumptions and axioms. Axioms are just formally stated assumptions. Axioms can help us: carefully develop the flow of an argument;concentrate on the individual components of key results; debug a wonky theory.

But they can never substitute for clear thinking about the purpose and essential functioning of the parent model and about the role of the specific model components for which axioms are to be introduced.

5. Equilibrium analysis

In the market for any particular good X, the decisions of buyers interact simultaneously (одновременно) with the decisions of sellers. When the demand for good X equals the supply of good X, the market for good X is said to be in equilibrium. Associated with any market equilibrium will be an equilibrium quantity and an equilibrium price. The equilibrium quantity of good X is that quantity for which the quantity demanded of good X exactly equals the quantity supplied of good X. The equilibrium price for good X is that price per unit of good X that allows the market to “clear”; that is, the price for which the quantity demanded of good X exactly equals the quantity supplied of good X. The determination of equilibrium quantity and price, known as equilibrium analysis, can be achieved in two different ways: by simultaneously solving the algebraic equations for demand and supply or by combining the demand and supply curves in a single graph and determining the equilibrium price and quantity graphically.

6. Positive and normative analysis

Microeconomics deals with both positive and normative questions.

Normative analysis  is that part of economics that expresses value judgments (normative judgments) about economic fairness or what the economy ought to be like or what goals of public policy ought to be.

It is common to distinguish normative economics ("what ought to be" in economic matters) from positive economics ("what is"). But many normative (value) judgments are held conditionally, to be given up if facts or knowledge of facts changes, so that a change of values may be purely scientific.

An example of a normative economic statement is as follows:      The price of milk should be $6 a gallon to give dairy farmers a higher living standard and to save the family farm.This is a normative statement, because it reflects value judgments. This specific statement makes the judgment that farmers need a higher living standard and that family farms need to be saved.

Positive analysis  is the branch of economics that concerns the description and explanation of economic phenomena.^[1] It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories; positive questions have to do with explanation and prediction.

The price of milk has risen from $3 a gallon to $5 a gallon in the past five years.This is a positive statement because it can be proven true or false by comparison against real-world data. In this case, the statement focuses on facts.