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Scarcity In Economics: Positive And Normative Economics Differences

Referencing Styles : APA | Pages : 1

Scarcity in economics

Economics is one type of social science. This branch of social science involves the matters regarding resource allocation, production, distribution and consumption of products and services. The subject deals with how the individuals, organizations, governments and countries make choices and decisions on resource allocation for satisfying the needs and wants of the people and to maximize the output in the most efficient manner. Hence, as satisfaction of needs and wants of people or consumer is a major factor in economics, it is associated with another important concept, namely scarcity.

In economics, the term ‘scarcity’ can be defined as limitations, which can occur for any type of goods or services, time, natural resources, factors of production etc. It is a fundamental economic problem. As the resources are mostly finite, the demand for the resources is quite infinite. It is a relative concept and not an absolute concept. For example, while water is less scarce in the rainforest regions, it is more scarce in the desert areas. Hence, to deal with scarcity, the society needs to make decisions and choices regarding efficient resource allocation with an aim to satisfy the basic as well as additional needs and wants. Resources that are not free, that is, have non zero cost have the characteristics of scarcity. Thus, scarcity arises when the means to satisfy the wants are limited as well as expensive. Natural resources, like, air is treated as a free resource and hence, it is considered as not scarce. On the other hand, where water is polluted and people need to pay for clean drinking water, then in those cases, water is scarce.

Difference between positive and normative economics

There are two branches of modern economics, positive and normative. Positive economic involves evaluation of economic events on the basis of real data and scientific evaluation methods and it focuses on describing the causes and effects of economic phenomena. On the other hand, normative economic is based on morality, values, ethics and principles. In other words, normative economics is concerned with the fairness of the economic events and these events or statements cannot be verified using real facts and figures, rather these are judged on the basis of ethics and principles. There are some essential differences between positive and normative economics and those are as follow:

  • Meaning: positive economics focuses on the economic events based on the real facts and these events are verifiable. Description, quantification and explanation of the economic phenomena are the main features of positive economics. On the contrary, normative economics illustrates economic events on the basis of opinions, judgments or perspectives of the economists, that is, under this branch of economics, morality and values are more important than the real facts.
  • Content: while positive economics presents and analyzes the cause and effect relationship of any economic event, normative economics presents the judgmental and ethical aspects of any economic phenomenon.
  • Nature: positive economics is descriptive and factual, while the nature of normative economics is prescriptive. Thus, while positive economics narrates the cause and effect of an economic phenomenon, normative economics prescribes what should have happened or what should happen in a particular situation.
  • Type of argument/perspective: under positive economics, the arguments are objective and these are well supported by relevant data, but under normative economics, the arguments are subjective. There is no existence of real data and the facts are morally fitted in the situations.
  • Merit of testing: the statements or the arguments under positive economics are verifiable and hence are tested with estimated figures, which leads to the findings or right, wrong or the difference. On the other hand, under normative economics, the arguments cannot be tested due to unavailability of data as these are based on different philosophies and moral values and morality or ethical aspects cannot be compared with real facts.
  • Cause of need: under positive economics, the economic phenomena is presented or described on the basis of the facts and judgments are passed based on the factual findings. In normative economics, the opinions or perspectives are prescribed on the basis of the findings from the positive economics. It provides a moral value to the system for achieving social welfare.
  • Based on: positive economics is based on reality and real data, facts and figures, difference in expectations, forces of demand and supply and practical implementation, while the normative economics is based on the ethics, moral values, principles, perspectives and fictional concepts.

Difference between command and market economies 

The organization of the economic activities is divided between two categories, command economies and market economies. The major difference between the command and market economies lies in the division of labour or the division of the factors of production and the mechanisms which determine the prices. While the centralized government determines the prices in a command economy, the prices are solely determined by market forces of demand and supply in a free market economy.

The major differences between the command and market economies are as follows.

  • Under command economy, all types of businesses, industries and economic units are controlled by the centralized government and not by private individuals, while under market economy, the businesses and industries are owned by private individuals.
  • Private property is considered illegal in command economy while the private property rights are strictly practiced in the market economy even if that results in few wealthy people and large number of poor people. In this economy, entrepreneurship and the risk taking activities result in financial gains, and increase in productivity leads to generation of more personal wealth.
  • In the command economy, the demand and supply and the prices are determined by the government and not by the buyers and sellers, but in the market economy, the demand, supply and prices are determined by the market forces and the producers determine what and how many to produce on the basis of the consumers’ demands.
  • The market activities are planned and certain in the command economy as these are controlled by the government, but under market economies the economic activities such as production, consumption and price determination are unplanned as the market forces are uncertain.
  • In the market economy, private individuals or businesses are free to exchange goods and services without any government intervention, but in a command economy, each economic activity requires full intervention by the government authority.
  • In command economy, there is no division of labour is involved, but in the market economy, market is entirely based on the division of labour.
  • There is fairly equal distribution practice of income under command economy while under market economy, income distribution is not equal or similar.

Thus, it can be said that the basic difference between the command and market economy is the division of labour and the ownership type. While the government has the total control on the resources and businesses in the command economy, the private individuals and the businesses control the resource ownership and economic activities under market economy.

l Government’s role in the economy is limited

l The economy is based on almost entirely on supply and demand

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