Economic comments: Positive vs Normative
Economic comments are classified as either positive or normative in Khan Academy videos. Positive remarks are attributed to analysis based on a causal factor and effect link (Khan Academy, 2017). It is based on facts and provides accurate economic information. The normative economic assertions, on the other hand, are based on judgment and focus on assessing economic variables from a moral and ethical standpoint. A normative statement is used to determine whether or not economic notions are desirable. The fundamental difference between positive and normative economics is that positive economics deals with facts and data on economic variables while normative statements deal with values, opinions, and judgments. Besides, positive economics is based on objectives and can be scientifically tested and approved, unlike normative statements which are not subject to approval or disapproval (Davis, 1998).
Example of Positive vs Normative Economics
For example, the statement, "Government should subsidize medical expenses to all citizens" is a normative economic statement since it is based on an individual's opinions and judgment. The statement cannot be approved or disapproved since it carries views on the role of government to subsidize medical expenses as its duties to citizens. On the other hand, the statement, "Government-provided education increases public expenditure" is a positive economic statement since it has facts and backed by data about macro-economic variables. The statement can be scientifically tested, approved or disapproved by checking data on government spending.
Demand and Supply
Demand and supply are fundamental economic concepts and form the core of economic principles and market structures. Demand refers to the quantity of goods and services desired by buyers at a point in time given a certain price. On the other hand, supply means the amount of property and services sellers are willing to bring to the market at the prevailing prices (Mankiw, 2007). Price is a reflection of both demand and supply since it shows the relationship between quantity demanded and quantity supplied at a given time. The relationship between demand and supply leads to the economics of scarce resources as both parties try to allocate resources most economically and efficiently.
The Law of Demand and Supply
The law of demand states that people will demand more goods and services if the prices are lower and vice versa. In summary, the law states that "the higher the price, the lower the quantity demanded." The demand curve is downward sloping showing the opportunity cost as people will naturally avoid buying a good that is costly and which will lead to them preceding other products and services (Khan Academy, 2017). On the other hand, the law of supply states that "the higher the price, the higher the quantity supplied." The law of supply shows a positive relationship between the price and the goods provided since the market and sellers will be willing to offer more products when the price is high to gain maximum profits (Mankiw, 2007). The supply curve shows an upward curve showing the positive relationship between supply and price of goods. Besides, another difference between demand and supply is that supply relationship is a factor of time. The relationship between demand and supply always lead to a concept of equilibrium through forced of demand and supply or intervention by government.
Example of Supply and Demand in a Market
Besides, a real life example of supply and demand is the interaction of buyers and sellers in an open market place. The price of vegetables and other household goods depends on the price and some commodities supplied. During peak hours, the price goes up since many people are demanding the product and fewer people providing it, this causes the price to go up. On the other hand, when there are many suppliers and fewer people demanding the product, the price drops, and demand increases.
Public Goods
Public goods are commodities that can be used by different people at the same time. The two key features of public goods are that they are both non-rival and non-excludable. Products and services such as public parks and street lights are both non-rival and non-excludable since all individuals have the capacity of maximizing utility from the product or service without reducing its availability or excluding it from another party. People's taxes finance a public good, and even those who don't pay the tax cannot be prohibited legally from consuming the good. Maintenance of security and law enforcement by the state is another example of public goods. However, in other cases, public goods can be excludable (Cornes & Sandler, 1984). For example, postal services can be excludable since it requires some small charges such as stamp expenses which can be a barrier to people who have not paid for it. Even though it is for public consumption, it has some small elements that make it excludable.
Tragedy of Commons and Free Rider Problem
The biggest difficulties in allocating public goods are the free rider problem and tragedy of commons (Cornes & Sandler, 1984). Public commodities and services which are naturally free such as mountains or provided by government suffer from these problems. The free rider problem occurs when a public good which is not excludable is used by everyone regardless of whether they pay or not. When government tries to allocate the public good, they face the challenge since many people evade taxes and do not contribute to the creation of the common good. The free rider problem necessitates provision by the government since the private sector cannot afford to provide goods such as roads that can be used by everyone without paying for it. Secondly, the tragedy of commons is a problem in the provision of public goods. In this case, people misuse and do not protect resources which they don't own. For example, minerals and wildlife are public goods which must be protected by the government to avoid the tragedy of commons where people misuse it leading to depletion and destruction.
Importance of Public Goods
The government should provide public goods due to market failure and the lack of such products in the market. For example, the government has a role in ensuring the security of its citizens by providing a police force to serve everyone. The private sector cannot venture into such business since it is not profitable and requires an enormous amount of capital. Besides, the collection of taxes to finance public goods is regulated by the government to avoid incidences of corruption and embezzlement of funds (Cornes & Sandler, 1984). Leaving public goods in the hands of private sectors will be less desirable due to maintenance and allocation of public property in a fair manner. Moreover, some goods should not be privatized since they are consumed by the society and are crucial in the day to day life. Commodities such as health, education, and roads, if privatized, will lead to classes in the economy and unequal distribution of wealth and resources.
References
Cornes, R., & Sandler, T. (1984). Easy riders, joint production, and public goods. The Economic
Journal, 94(375), 580-598.
Davis, J. B. (1998). Normative and Positive Economics.
Khan Academy, (2017). Introduction to Economics.
Mankiw, NG 2007, Microeconomics. New York: Worth Publishers.
