Economics Analysis & its Methods

Economics Analysis studies how rational individuals make their decisions under conditions of scarcity while facing different alternatives, and how these decisions affect other economic agents. It starts from the idea that individuals rationally decide rules of behavior, rules such as maximizing their utility, whether consumers, or maximizing their benefits, if it is producers, trying to achieve them. 

More from Business Study Notes:- Difference between Microeconomics and Macroeconomics

Generally, individuals are faced with possible alternatives and are subject to restrictions that must be taken into account in their decision-making, because as human and material resources are limited, employing them in one end necessarily means giving up using them for another. The Economics Analysis studies precisely how the agents optimize their behavior in the face of possible alternatives to achieve their goals.

The Divisions of Economic Analysis

Broadly speaking, Economics Analysis is divided into two major branches: microeconomics and macroeconomics. This division is only of a practical nature, as each day is emphasized and recognized more in the microeconomic basis of the macroeconomics and the traits that unite them. Therefore, following this division, which is still purely formal, microeconomics, tries to study the behavior of individual economic agents, while macroeconomics studies the behavior of large economic aggregates.

The vast majority of the Introduction to Economics manuals begins their chapters by distinguishing precisely between the two fundamental parts of Economic Theory: Micro and Macroeconomics and emphasizing that basically, the difference lies in the question raised and the level of aggregation used.

Practically, the microeconomic approach prevailed in Economics Analysis until the Great Depression. From this great economic collapse, the focus shifted from the variables traditionally studied, from the time of Adam Smith, that is, profit maximizing companies faced with well informed and perfectly rational consumers, towards the big questions about the behavior Of aggregate variables such as growth of GNP, rate of inflation, unemployment, etc.

It is said that the first differentiation expresses the terms “microeconomics” and “macroeconomics” and is due to P. de Wolff, an economist at the Netherlands Statistical Institute, who wrote in 1944: “Microeconomic interpretation refers to the relationship corresponding to the case of a single person or family. The macroeconomic interpretation is derived from a similar situation corresponding to the case of a large group of people or families (social strata, countries, etc.). “However, although not so expressly, Norwegian economist, Ragnar Frisch, later Nobel Prize-winning economist in 1969, had already conceived these ideas when he referred to micro and macrodynamics: “Microdynamic analysis is an analysis with which we try to explain in some detail the behavior of a given Part of the enormous economic mechanism, assuming that some general parameters are given Macrodynamic analysis tries, on the contrary, to explain the global economic system considering it as a whole “.

Keynes himself already makes a certain division between these two aspects of Economics Analysis by pointing out: “I propose that the economy be divided in the theory of industry or enterprise and of the salaries and distribution of a certain amount of resources, On the one hand, and the theory of production and employment as a whole, on the other.”

However, despite the undoubted pedagogical advantages of the division between micro and macroeconomics, more modern authors point out that this division should not be exaggerated and removed from the context of its pedagogical utility, since modern macroeconomics has undoubted microeconomic foundations that They cannot be ignored. For example, we cannot forget that aggregate demand and supply start from microeconomic analytical foundations. In fact, it is a question of observing the same phenomena from different prisms. Thus, P. Samuelson points out that “in our study of microeconomics we examine the behavior of each parts of the economy. In macroeconomics, on the other hand, we examine the economy with a lens Wide angle”. In this way, because they are simply different optics from the same phenomena, many economists from the 60s have tried to draw bridges between the two disciplines and to emphasize their interrelation, rejecting excessive specialization. J. Stiglitz states that it is often extremely interesting to reflect on “why the interrelationship of rational and well-informed consumers and profit-maximizing companies sometimes generates unemployment and inflation or causes fluctuations in growth” and partialize excessively economic theory, despite the undeniable pedagogical utility, impoverishes the analysis.

In turn, the type of approach used by Economics Analysis can be, on the one hand, normative, if value judgments are made on a certain economic issue, and in this case come into play the values and opinions of the person doing the Analysis, and on the other hand, it can be a positive approach, when one examines an economic fact with the instruments of economic analysis, without going on to assess the appropriateness of that situation or the desirability or not of its consequences. In many cases, the confusion between both approaches has led to a certain discredit to the Economy as Science.

Properly said, Economics Analysis has its natural essence and refers primarily to positive economics, but naturally, every economist has his beliefs, his vision of how things should be and his own personal opinions, and although there are important discrepancies in The consequences that can be extracted from the economic analysis, there is a great consensus with respect to the instruments of this analysis. As Keynes said, Economics Analysis is a way of approaching economic problems, a way of looking at them rather than a method of opining about them.