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LERNER INDEX: The difference between price (p) and marginal cost (mc) as a fraction of price, that is [p-mc]/p. The Lerner index is usually taken as an indicator of market power because the larger the index, the larger the difference between price and marginal cost, that is, the larger the distance between the price and the competitive price. The Lerner index depends on the elasticity of demand. The Lerner index is also called the price-cost margin.

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POSITIVE ECONOMICS:

The branch of economics that seeks to explain the way the economy actually operates. It is the application of the scientific method and the process of testing hypothesis to economic phenomena. A positive economic statement is one that can be refuted by looking at the real world--that is, by testing a hypothesis.
Positive economics results when the scientific method is applied to economic phenomena and issues related to the fundamental problem of scarcity. The scientific method is a systematic process of investigating the way the world works by verifying hypothesized relations against real world data. Those hypotheses that are satisfactorily verified become principles and are incorporated into scientific theories.

Science and Policy

The study of economics involves both scientific investigation and policy analysis. Economists first use science to explain the world and understand how the economy works, then they explore policies designed to improve the world.

This means that economists practice both:

  • Positive economics, which uses the scientific method to uncover the mechanism of the economy, seeks to describe the way this world IS.

  • Normative economics, which recommends policies suggested by scientific knowledge to "fix" the world, seeks to prescribe the way the world SHOULD BE.

Description versus Prescription

  • Positive economics uses the scientific method to uncover the mechanism of the economy, to lay out the rules, to take it apart and see how it ticks. Positive economics seldom has room for debate. Either it is or it is not. Just the facts, facts which can be verified.

  • This is not true for normative economics--the policy side of economics. While positive economics seeks to describe the way it is, normative economics seeks to prescribe the way it should be. Normative economics is used to recommend ways to change the world, to improve it, to make it a better place.

  • There is a lot of room for debate over normative economics and what constitutes a better world. A better world for Pollyanna Pumpernickel, might not be a better one for Winston Smythe Kennsington III. In most markets. a better world for sellers is higher prices, while a better world for buyers is lower prices. There are no absolutely right or wrong normative actions.

Working Together

While some might choose to do either positive economics or normative economics, most economists do both. That is because both work together. The science of positive economics describes the mechanism of the economy. It lays out the options. If A happens, then B results. But does society really want B? Would society prefer to avoid B? The policies of normative economics then prescribes the best way to pursue A, or B, or something else.

Positive Economic Statements

Consider these examples of positive economic statements:
  1. An increase in the price of wheat to $5 a bushel gives farmers a higher living standard and helps save 1,000 family farms.
  2. The United States spends $10 billion more on national defense than on higher education.
  3. A market-based economy has less income inequality that other economic systems.

Each of these statements can be, in principle, verified by comparison with real world data.

  1. To verify statement (1) wheat prices can be checked to see if they did, in fact, increase to $5 a bushel. Farmers' living standards (measured with something like per capita income) can then be examined to see if they have increased and whether or not 1,000 family farms that might have gone out of business are still operating. Verifying this statement can be quite involved, requiring sophisticated statistical procedures. However, the fact that it can be verified, at least in principle, is what makes it a positive statement.
  2. Statement (2) is much more easily verified by checking how much was spent on national defense and how much was spent on education.
  3. Statement (3) can also be easily verified by examining measures of income inequality, such as the Gini coefficient, for a range of economic systems.

The key with each of these statements is that no value judgments are involved (as there would be the case for normative statements).

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POSITIVE ECONOMICS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: July 23, 2024].


Check Out These Related Terms...

     | normative economics | axiom | assumption | world view |


Or For A Little Background...

     | economics | economic goals | mixed economy | dismal science | economic thinking | political views |


And For Further Study...

     | economic analysis | seven economic rules | three questions of allocation | fallacies | comparative statics | ceteris paribus | cause and effect | scientific method |


Related Websites (Will Open in New Window)...

     | American Economic Association |


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