Economics is sometimes divided into two parts: positive economics and normative economics. The former deals with how the economic problem is solved, while the latter deals with how the economic problem should be solved. The effects of price or rent control on the distribution of income are problems of positive economics. The desirability of these effects on income distribution is a problem of normative economics. Within economics, the major division is between monetary theory and price theory. Monetary theory deals with the level of prices in general, with cyclical and other fluctuations in total output, total employment, and the like. Price theory deals with the allocation of resources among different uses, the price of one item relative to another. Prices do three kinds of things. They transmit information, they provide an incentive to users of resources to be guided by this information, and they provide an incentive to owners of resources to follow this information. Milton Friedman's classic book provides the theoretical underpinning for and understanding of prices. Economics is not concerned solely with economic problems. It is a social science, and is therefore concerned primarily with those economic problems whose solutions involve the cooperation and interaction of different individuals. It is concerned with problems involving a single individual only insofar as the individual's behavior has implications for or effects upon other individuals. Price Theory is concerned not with economic problems in the abstract, but with how a particular society solves its economic problems.
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alternative amount analysis average variable cost axis clearly commodity competitive consider constant consumer consumption contract corresponding course curve in Figure decline demand curve depends determine distribution of income dwelling units economic effect elasticity employment entrepreneurial capacity equal equation example excise tax expected factors of production fixed Friedman given hence higher horizontal human capital income effect income tax increase indifference curve individual firm industry inelastic inflation interest rate involved labor less long-run marginal cost curves marginal product marginal utility means Milton Friedman money income Monopsony negative nominal wages nonhuman occupations optimum output payment permanent income streams Phillips curve possible price theory problem production function purchase rate of interest ratio real income real wage receipts regarded relevant rent rise short-run slope substitution supply curve suppose tion unit time FIGURE utility function vertical wage rate wealth Xerox yield zero