Wednesday, March 15, 2017

Microeconomics (2066Q1 Detail): Distinguish between inductive and deductive methods in economics. Which method, in your opinion, is more appropriate in microeconomics? Why?

Methods of Economic Analysis:

An economic theory derives laws or generalizations through two methods:

(1) Deductive Method and
(2) Inductive Method

These two ways of deriving economic generalizations are now explained in brief:

The deductive method is also named as analytical, abstract or prior method. The deductive method consists in deriving conclusions from general truths, takes few general principles and applies them draw conclusions.

For instance, if we accept the general proposition that man is entirely motivated by self-interest. In applying the deductive method of economic analysis, we proceed from general to particular.

The classical and neo-classical school of economists notably, Ricardo, Senior, Cairnes, J.S. Mill, Malthus, Marshall, Pigou, applied the deductive method in their economic investigations.

The main steps involved in deductive logic are as under:

(i) Perception of the problem to be inquired into: In the process of deriving economic generalizations, the analyst must have a clear and precise idea of the problem to be inquired into.

(ii) Defining of terms: The next step in this direction is to define clearly the technical terms used analysis. Further, assumptions made for a theory should also be precise.

(iii) Deducing hypothesis from the assumptions: The third step in deriving generalizations is deducing hypothesis from the assumptions taken.

(iv) Testing of hypothesis: Before establishing laws or generalizations, hypothesis should be verified through direct observations of events in the rear world and through statistical methods. (Their inverse relationship between price and quantity demanded of a good is a well established generalization).

(2) Inductive Method of Economic Analysis:

Inductive method which also called empirical method was adopted by the "Historical School of Economists". It involves the process of reasoning from particular facts to general principle.

This method derives economic generalizations on the basis of (i) Experimentation (ii) Observations and (iii) Statistical methods.

In this method, data is collected about a certain economic phenomenon. These are systematically arranged and the general conclusions are drawn from them.

For example, we observe 200 persons in the market. We find that nearly 195 persons buy from the cheapest shops, Out of the 5 which remains, 4 persons buy local products even at higher rate just to patronize their own products, while the fifth is a fool. From this observation, we can easily draw conclusions that people like to buy from a cheaper shop unless they are guided by patriotism or they are devoid of commonsense.

The main steps involved in the application of inductive method are:
(i) Observation.
(ii) Formation of hypothesis.
(iii) Generalization.
(iv) Verification.

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