Managerial economics: principles and applications

¶ … economic terms, such as scarcity and positive and normative economics, with the proposed goals of understanding the way that resources are part of the production process and of the decision making process within an economic entity.

As Milton Freedman has pointed out, positive economics describes and discusses "what is," while normative economics described "what ought to be" (Friedman, 1953). The distinction between these two notions is giving by the level of empirical knowledge in each case. Positive economics is the part of economic that uses empirical explanations for given economic facts and for the analysis. The conclusions in positive economics are drawn based on real-world data and their analysis.

Normative economics, on the other hand, is a more theoretical approach to economics and economic analysis, whereby conclusions and explanations are not necessarily drawn through the analysis of data and economic statistics and information, but through a subjective analysis of the individual. Ideally, a certain economic fact could be explained, at a theoretical level, with normative economics, from the subjective perspective of the individual who does the analysis and explanation. There is no certainty that this is how things actually occur in the economic reality.

From this point-of-view, economics should be primarily concerned with positive economics, because positive economics gives an objective explanation of what occurs in the economic environment. It does not provide the solutions as to what economic entities should do, but it gives a good idea about how things are, building the right premise in the decision making process. Positive economics seems to be a more pertinent evaluation of the economic reality, which is why decision makers should be primarily concerned with positive economics.

The concept of scarcity refers to the fact that, from an economics perspective, individuals have unlimited needs, but limited resources and, as such, the resources in a society are never sufficient to fulfill the needs of that society. The problem with scarcity from an economics perspective is that human beings are likely to finish their resources at some point in the future, because, both as individuals and as a society, the needs are continuously growing, at a higher pace than the existing resources. This is something that is quite applicable when it comes to immediate needs, such as the need for energy or for food. Consumption in these sectors has progressively led to the scarcity of resources, with the general assumption that, at some point in the future, those resources will be finished.

However, despite the unlimited needs of the population, some resources are not scarce, either because they are sufficiently abundant in the world (like the air that we breath) or because the human need, although growing, has not grown to sufficient levels to make these resources scarce (like seawater, for example).