Like any other science, Economics also has its laws or generalisations. These laws, govern the activities in the various divisions of Economics such as Consumption, Production, Exchange an
d Distribution. The logical process of arriving at a law or generalization in science is called its method.
Economics uses two methods: Deduction and Induction. Economists today say both these methods are complementary. Alfred Marshall has rightly remarked: “Inductive and Deductive methods are both needed for scientific thought, as the right and left foot are both needed for walking”.
Deductive Method of Economic Analysis
The deductive method is also named an analytical or abstract method. It consists of deriving conclusions from general truths; it takes few general principles and applies them to draw conclusions. The classical and neoclassical school of economists notably, Ricardo, Senior, J S Mill, Malthus, Marshall, Pigou, applied the deductive method in their economic investigations.
Steps of Deductive Method
Step 1: The analyst must have a clear and precise idea of the problem to be inquired into.
Step 2: The analyst clearly defines the technical terms used in the analysis. Further, assumptions of the theory are to be precise.
Step 3: Deduce the hypothesis from the assumptions taken.
Step 4: Hypotheses should be verified through direct observation of events in the real world and through statistical methods. (eg) There exists an inverse relationship between price and demand of a good.
Inductive Method of Economic Analysis
The inductive method, also called the empirical method, is adopted by the “Historical School of Economists”. It involves the process of reasoning from particular facts to a general principle. Economic generalizations are derived in this method, on the basis of
- Experimentations
- Observations
- Statistical methods
Steps of Inductive Method
Step 1: Data are collected about a certain economic phenomenon. These
are systematically arranged and the general conclusions are drawn from
them.
Step 2: By observing the data, conclusions are easily drawn.
Step 3: Generalization of the data and then Hypothesis Formulation
Step 4: Verification of the hypothesis (eg. Engel’s law)
According to Engel’s Law “The proportion of total expenditure incurred on food items declines as total expenditure [which is proxy for income] goes on increasing.”