Nature of economics refers to whether economics is a science or art or both, and if it is a science, whether it is positive science or normative science or both.
Economics as a Science
• We have often stated that economics is a social science.
• Economics as a social science studies economic activity of the people.
• Economics is a systematic body of knowledge as it explains cause and effect relationship between various variables such as price, demand, supply, money supply, production, national income, employment, etc.
• Economic laws, like other scientific laws, state what takes place when certain conditions (assumptions) are fulfilled.
· This is the traditional Deduction Method where economic theories are deduced by logical reasoning.
• The law of demand in economics states that a fall in the price of commodity leads to a large quantity being demanded ‘given other things’, such as income of the consumer, prices of other commodities, etc., remaining the same.
• In economics we collect data, classify and analyse these facts and formulate theories or economic laws.
• The truth and applicability of economic theories can be supported or challenged by confronting them to the observations of the real world.
• If the predictions of the theory are refuted by the real-world observations, the theory stands rejected.
• If the predictions of the theory are supported by the real-world events, then the theory is formulated.
• The laws of economics or economic theories are conditional subject to the condition that other things are equal.
• Economic theories are seldom precise and are never final; they are not as exact and definite as laws of physical and natural sciences.
• The laws of physical and natural sciences have universal applicability, but economic laws are not of universally applicable.
• The laws of physical and natural sciences are exact, but economic laws are not that exact and definite.
Economics as an Art
• Various branches of economics, like consumption, production, distribution, money and banking, public finance, etc., provide us basic rules and guidelines which can be used to solve various economic problems of the society.
• The theory of demand guides the consumer to obtain maximum satisfaction with given income.
• Theory of production guides the producer to equate marginal cost with marginal revenue while using resources for production.
• The knowledge of economic laws helps us in solving practical economic problems in everyday life.
Economics as a Positive Science
• A positive science is that science in which analysis is confined to cause and effect relationship.
• Positive economics is concerned with the facts about the economy.
• It studies the economic phenomena as they exist.
• It finds out the common characteristics of economic events.
• It specifies cause and effect relationship between them.
• It generalizes their relationship by formulating economic theories and makes predictions about future course of these economic events.