In economics, there are two methods of deriving the generalizations or laws and they are called as deductive method and inductive method:
This method is also called as abstract, analytical and priority method. Under this method, laws are deduced in a logical manner. On the basis of certain fundamental assumptions or accepted axioms (principles) or truths which have been established and handed down from generation to generation, the required conclusions are found out. This method is called as abstract since it is based on abstract reasoning and not actual facts. However, actual situation may differ from what deductive logic suggests.
For example, it is assumed that the man is rational and on the basis of this it is deduced that he will buy cheap and sell dear ones. However, in actual situation this may not happen because of the absence of proper knowledge and market conditions.
The principle steps in the process of deriving economic generalizations through deductive logic are:
1. perception of the problem;
2. defining the technical terms and making the appropriate assumptions;
3. deducing hypothesis and;
4. testing of hypothesis deduced.
Through the use of deductive method, many theories and generalizations have been established in economics. It is called as inverse relationship between the price and quantity demanded, the direct relationship between the price and quantity supplied etc. However, this method also suffers from certain handicaps such as (i) assumptions generally turn out to be untrue or partially true; (ii) valid conclusions cannot be drawn in the absence of proper knowledge of the whole situation and (iii) it is dangerous to claim universal validity for the economic generalizations so deduced.
According to this method, conclusions are drawn on the basis of collection and analysis of the facts which are relevant to the inquiry. The logic in this case