What you’ll learn to do:explain the assumption of economic rationality, define marginal analysis, and differentiate between positive and normative reasoning.
This module is about how economists analyze issues and problems, which is sometimes referred to as the “economic way of thinking.” In the previous sections of the module, we explored two common models used by economists to think about economic issues. Now we segue into introducing some specific features of economic thinking: economic rationality, marginal analysis, and positive vs. normative reasoning.
Economists assume that humans makedecisions inpredictable ways.They believe that, when making choices, people try to avoid costsand maximize benefits to themselves.This is what economists mean by rational decision-making.
Economists recognize that very fewchoices in the real world are “all or nothing.” Most of the time, people have the choiceto do a little more or a little less of something: Should you eat one more muffin? Should you study economics for anotherhour? Should you spend a little less money on gas? Economists use the wordmarginalto mean “additional” or “extra,” and they use the termmarginal analysisto describe how people make choices by comparing thebenefits and costs of doing a bit more or a bit less.
Economists can make two kinds of arguments.Positive reasoningisscientific reasoning, based on theories and evidence.Policy decisions often employnormative reasoning, whichis based on values.For reasons we will see later, it is important to be able to to differentiate between the two.
