Difficulty: Introductory | Prerequisites: None
This material sits at the very start of an introductory microeconomics course. Positive vs normative analysis teaches you to separate factual, testable claims from value judgements, a distinction that underpins every policy debate you will encounter later. Supply and demand shifts are the foundational toolkit: once you can identify which curve moves and in which direction, you can predict how price and quantity change in any market. You need no prior economics knowledge, but comfort reading simple graphs (axes, slopes, intersections) will help.
Positive statements describe what is or what will happen and can be tested with data. Normative statements express opinions about what should happen and cannot be tested empirically. When an external event hits a market, decide whether it affects producers (supply shift) or consumers (demand shift), determine the direction, and read the new equilibrium off the graph.
Positive analysis
A statement or claim that describes how the world is, based on facts and logic, and can in principle be tested or verified with evidence.
Think of it as: a claim you could settle by looking at data, regardless of anyone's opinion.
Normative analysis
A statement or claim that expresses a value judgement about how the world should be. It involves opinions, ethics, or policy preferences and cannot be proved or disproved with data alone.
In simple terms, this means: any sentence with "should," "ought to," or "it would be better if" is almost certainly normative.
Demand curve
A graph showing the quantity of a good consumers are willing and able to buy at each price, holding all other factors constant. It slopes downward: higher price, lower quantity demanded.
Think of it as: the buyer's side of the market.
Supply curve
A graph showing the quantity of a good producers are willing and able to sell at each price, holding all other factors constant. It slopes upward: higher price, higher quantity supplied.
Think of it as: the seller's side of the market.
Equilibrium
The price and quantity at which quantity demanded equals quantity supplied. Graphically, it is the intersection of the supply and demand curves.
In simple terms, this means: the point where the market clears, with no surplus and no shortage.
Ceteris paribus
Latin for "all other things being equal." In economics, it means we change one variable at a time and hold everything else constant so we can isolate the effect.
Think of it as: the economist's version of a controlled experiment.
Shift vs movement along a curve
A shift means the entire curve moves left or right because of a change in a non-price factor (income, tastes, input costs, technology, etc.). A movement along the curve happens when the good's own price changes.
In simple terms, this means: if the cause is the good's own price, you slide along the curve. If the cause is anything else, the curve itself shifts.
The core test: can the statement be verified or falsified with data? If yes, it is positive. If it rests on a value judgement, it is normative.
Positive statements make a factual claim about cause and effect. They may be true or false, but the point is that evidence could settle the matter.
"Government-provided healthcare will lead to an increase in public expenditure." This predicts a measurable outcome. You could check budget data before and after the policy. Positive.
"Regulations that increase the wage paid to Uber and Lyft drivers will raise the cost of rides." This is a cause-and-effect prediction about prices. Testable with price data. Positive.
"Government-provided Economic Impact Payments will raise the level of consumption expenditure." Again, a testable prediction about spending behaviour. Positive.
Normative statements include a judgement about what ought to be done. Look for words like "should," "ought to," or "it would be better if."
"The subsidies of the European Union's Common Agriculture Policy (CAP) should be removed." The word "should" signals an opinion. Two economists could agree on the facts and still disagree on this. Normative.
"The government should provide basic healthcare to all citizens." Same structure: a policy recommendation driven by values, not a testable prediction. Normative.
Does it contain "should," "ought," or an equivalent value word? Probably normative.
Does it predict an outcome or describe a relationship? Probably positive.
Could you design a study to prove or disprove it? If yes, positive. If the disagreement would persist even with perfect data, normative.
When something changes in a market, the analytical steps are always the same:
Identify whether the event affects supply or demand.
Determine the direction of the shift (left or right).
Read the new equilibrium price and quantity from the graph.
Consumer income
Tastes and preferences
Prices of related goods (substitutes and complements)
Expectations about future prices
Number of buyers
A rightward shift means higher demand at every price. A leftward shift means lower demand at every price.
Input costs (wages, raw materials, energy)
Technology
Number of sellers
Government regulation, taxes, subsidies
Natural events (weather, disasters)
A rightward shift means higher supply at every price. A leftward shift means lower supply at every price.
Market for oil: declining reserves make extraction harder
This raises the cost of production for oil producers. Higher input costs shift the supply curve to the left. Result: equilibrium price rises, equilibrium quantity falls.
Market for airplane travel: COVID-19 fears reduce willingness to fly
Consumer preferences shift away from air travel. The demand curve shifts left. Result: equilibrium price falls, equilibrium quantity falls.
Market for organic vegetables: a trend toward healthy eating boosts purchases
Consumer tastes shift in favour of organic vegetables. The demand curve shifts right. Result: equilibrium price rises, equilibrium quantity rises.
Market for beer: higher hop prices raise brewing costs
Hops are an input to beer production. More expensive inputs shift the supply curve left. Result: equilibrium price rises, equilibrium quantity falls.
Market for rental housing: NYC loosens zoning regulations
Loosening zoning allows more apartments to be built, increasing the quantity landlords can supply at every price. The supply curve shifts right. Result: equilibrium price falls (rents decrease), equilibrium quantity rises (more apartments available).
Scenario | Curve that shifts | Direction | Price effect | Quantity effect |
|---|---|---|---|---|
Oil reserves deplete | Supply | Left | Rises | Falls |
COVID-19 fear of flying | Demand | Left | Falls | Falls |
Healthy-eating trend (organic veg) | Demand | Right | Rises | Rises |
Hop prices rise (beer) | Supply | Left | Rises | Falls |
NYC loosens zoning (rental housing) | Supply | Right | Falls | Rises |
Confusing a shift with a movement along the curve. A change in the good's own price causes movement along the existing curve. A change in any other factor (input costs, tastes, income) shifts the entire curve. This is the single most common error in introductory micro.
Assuming "should" statements are positive because they feel logical. "The government should provide healthcare" might seem obviously true to you, but it is still normative. The test is not whether you agree with the statement; it is whether data alone could settle the question.
Trying to shift both curves at once for a single event. Each event typically affects one side of the market. An increase in input costs is a supply-side event, not a demand event. Resist the urge to move both curves unless the question explicitly describes two simultaneous changes.
Forgetting that a leftward supply shift means less supplied at every price, not a lower price. The supply curve moves left (or equivalently up), raising the price consumers must pay. Students sometimes read "decrease in supply" as "prices fall," which is backwards.
⚠️ Positive vs normative is tested early and often. Expect 2-3 classification questions on the midterm. The marker words are "should" (normative) and "will" (positive).
⚠️ Supply and demand shift analysis is the backbone of the entire course. Every later topic (taxes, price controls, international trade) builds on your ability to shift the right curve in the right direction.
⚠️ You will be asked to draw diagrams. Label both axes (Price on the vertical, Quantity on the horizontal), label both curves, mark the old and new equilibrium, and show the direction of price and quantity changes with arrows.
⚠️ Exam questions often combine a real-world scenario with "explain using a supply and demand diagram." Practice translating a paragraph of news into: which curve, which direction, what happens to P and Q.
True or false: "The minimum wage should be raised to $15" is a positive statement.
False. The word "should" makes it normative.
True or false: If consumer tastes shift toward a product, the demand curve shifts right and both equilibrium price and quantity rise.
True.
Fill in the blank: An increase in the cost of a key input shifts the ______ curve to the ______.
Supply; left.
True or false: A decrease in demand causes equilibrium price to rise and equilibrium quantity to fall.
False. A decrease in demand (leftward shift) causes both price and quantity to fall.
Fill in the blank: When the supply curve shifts right, equilibrium price ______ and equilibrium quantity ______.
Falls; rises.
Q: Classify this statement as positive or normative: "A tax on sugary drinks will reduce obesity rates."
A: Positive. It makes a testable prediction about the effect of a policy on a measurable outcome. Whether or not you agree, data could in principle confirm or refute it.
Q: A new technology makes it cheaper to produce electric vehicles. Using a supply and demand diagram, what happens to the equilibrium price and quantity of electric vehicles?
A: The cheaper technology lowers production costs, shifting the supply curve to the right. Equilibrium price falls and equilibrium quantity rises.
Q: Coffee and tea are substitutes. If the price of coffee rises sharply, what happens in the market for tea?
A: Consumers switch from coffee to tea, increasing the demand for tea. The demand curve for tea shifts right. Equilibrium price and quantity of tea both rise.
Q: A hurricane destroys a large portion of Florida's orange crop. What happens in the market for orange juice?
A: The destruction of the crop reduces the supply of oranges (a key input). The supply curve for orange juice shifts left. Equilibrium price rises and equilibrium quantity falls.
Q: The government announces that it "ought to" subsidise renewable energy. Is this a positive or normative statement?
A: Normative. "Ought to" is a value judgement. The statement expresses a policy recommendation, not a testable prediction.
The positive/normative distinction reappears whenever the course discusses government policy: price controls, taxes, trade restrictions. In each case, the effects of the policy are positive analysis; whether the policy is desirable is normative.
Supply and demand shift analysis is the direct foundation for the equilibrium algebra covered in the next section of these notes (Market Equilibrium). It also feeds into elasticity: how much price and quantity change depends on the slopes (elasticities) of the curves, which you will study shortly after.
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