Basic Economic Concepts and Principles
Senior 4 · Economics
Basic Economic Concepts and Principles
Lesson 3 of 5
25 min
Read these two sentences carefully.
The first can be checked against the survey: it is either right or wrong. The second cannot be proved true or false by any data, because it depends on what you think matters most. Economists need both kinds of sentence, but they must never confuse them. This lesson looks at what kind of subject economics is, how its statements are tested and how its field is divided.
A science is a systematic body of knowledge built by observing facts, forming hypotheses and testing them against evidence. Economics qualifies:
But it is not an exact science like physics. It studies people, whose behaviour changes with tastes, fashion and expectations; it can rarely run controlled laboratory experiments on a whole economy; its laws are tendencies that hold only ceteris paribus; and economists may disagree because of differing values. That is why economics is called a social science.
Definition
Social science: a science that studies human beings and how they behave in society. Economics is one, alongside sociology, political science, psychology and history, and it borrows tools from mathematics and statistics.
Example: explaining why households in Kigali spend a larger share of income on transport than households in rural districts needs economics, sociology and geography together.
Definition
Economics as an art: an art is the practical use of knowledge to reach a given goal. In The Scope and Method of Political Economy (1891), John Neville Keynes separated a positive science (what is), a normative science (what ought to be) and an art (rules for reaching a given end).
Example: the National Bank of Rwanda raised its central bank rate by 0.25 percentage points to 6.75% in August 2025 in response to rising inflation pressures (BNR, March 2026). Using monetary theory to choose that move is economics as an art.
Definition
Positive economics: statements about what is, was or will be. They can be tested against facts, so they can be shown to be true or false.
Normative economics: statements about what ought to be. They contain a value judgement, so evidence alone can never settle them.
Signal words: normative statements often contain "should", "ought", "fair", "too high", "better" or "unacceptable".
Worked example 1: classifying statements
| Statement | Type | Reason |
|---|---|---|
| Average headline inflation in Rwanda rose from 4.8% in 2024 to 7.0% in 2025 (BNR). | Positive | Can be checked against BNR and NISR price data |
| Inflation of 7% is too high for poor households to bear. | Normative | "Too high" is a judgement |
| If the price of cooking gas rises, ceteris paribus, households will buy less of it. | Positive | A prediction that can be tested |
| Rwanda's unemployment rate is 50%. | Positive | It is false (NISR: 12.4% in 2025), but it can be tested, so it is still positive |
| Richer people ought to pay a larger share of their income in tax. | Normative | "Ought" expresses a view of fairness |
Rule: ask "Could data settle this?" If yes, it is positive, whether right or wrong. If no, it is normative.
Warning
"Positive" does not mean "true" or "good". A wrong statement of fact is still positive, and a normative statement is not bad just because it contains an opinion. Normative judgements are essential: they set the goals, and positive economics then finds the best way to reach them.
The scope of a subject is the range of what it studies. Economics has traditionally been divided into five areas: consumption (how wants are satisfied), production (how goods are made), exchange (how goods are traded and priced), distribution (how income is shared among the factors) and public finance (how the state raises and spends money). Modern economics is usually split into two branches.
| Microeconomics | Macroeconomics | |
|---|---|---|
| Studies | Individual units: one consumer, one firm, one market or industry | The economy as a whole: totals and averages (aggregates) |
| Key questions | How is the price of beans set? How much should a firm produce? | Why does national output grow? What causes inflation and unemployment? |
| Main tools | Demand and supply, costs, revenue, elasticity | National income, aggregate demand, money supply, balance of payments |
| Example from Rwanda | The price a coffee washing station pays for cherries | GDP growth of 9.4% in 2025 (NISR); inflation of 7.0% in 2025 (BNR) |
| In this course | S4 Units 2 to 7 | Mainly S5 and S6 |
Definition
Microeconomics: the study of the behaviour of individual economic units (households, firms and single markets).
Macroeconomics: the study of the economy as a whole, through aggregates such as national income, the general price level and total employment.
Worked example 2: what is true for one is not always true for all (illustrative figures)
A bean farmer harvests 1,000 kg and sells at Frw 500 per kg.
Case A: only she doubles her harvest. She is too small to affect the market price, so the price stays at Frw 500:
Case B: every farmer doubles the harvest. The market is flooded and the price falls, say to Frw 200 per kg:
Conclusion: reasoning that holds for one farmer (micro) fails for all farmers together (macro). This error is called the fallacy of composition, and it is one reason the two branches are studied separately. You will meet the full explanation in Unit 3, Elasticity.
Tip
Micro or macro? Look for the word "total" or "general". Total output, the general price level, the national unemployment rate and the country's exports are macro. One price, one firm, one household or one industry is micro.
Important
Discuss. Economists often agree on positive questions but disagree on normative ones. Using youth unemployment in Rwanda as your example, explain why.
tutor2u, "Positive and Normative Statements", a short A-level explainer. Notice the value-judgement words that mark a normative statement, then test them on the statements in Worked example 1.
Practice
Key points
Sources and credits
Written by Ganzaa: the text, the scientific-method diagram, the tables, the worked examples and the practice items. The bean and tomato figures are illustrative. The photo is shared under CC BY-SA 4.0.
Quick check
The statement "Rwanda's unemployment rate is 50%" is a normative statement because it is false.
