The deductive method is also named as an analytical, abstract or prior method. The deductive method consists in deriving conclusions from general truths, takes a few general principles and applies them to draw conclusions. Deductive methods of economic analysis follows a top-down approach where theories and principles guide the analysis and assist in making prediction about the economic variables.
Some of the theories and Principles that follows this deductive method of economic analysis are:
- Theory of Demand and Supply
- Rational Choice Theory
- Capital Asset Pricing Model
- Neo Classical Economics
Merits of Deductive Methods
- Reliance on logical and systematic reasoning through deductive methods, economists can maintain consistency and coherence in economic analysis. Following such structured approach, a strong and solid foundation of reasoning and principle can be established.
- It is simple, precise and effective; there is no need for collection and elaborating statistical information.
- The use of statistical and mathematical techniques makes it more authentic and reliable.
- It is a simple method, doesn’t involve the use of any complex software analysis. It requires simple deductive logic.
- This method is important for economists as it focuses upon economic reasoning which is of paramount importance
- The deductive method is simple because it is analytical. It involves abstraction and simplifies a complex problem by dividing it into component parts.
- There being a limited scope of experimentation, the method helps in deriving economic theories.
- The deductive method results in accuracy and exactness in generalization, because of logical reasoning. The method gives a very high standard of precision in abstract economic reasoning.
Demerits of Deductive Methods
- The deductive method is simple and precise only if the underlying assumptions are valid. More often the assumptions turn out to be based on half-truths or have no relation to reality. The conclusions drawn from such assumptions will, therefore, be misleading.
- Professor Learner describes the deductive method as ‘armchair’ analysis. According to him, the premises from which inferences are drawn may not hold good at all times, and places. As such deductive reasoning is not applicable universally.
- The deductive method is highly abstract. It requires; a great deal of care to avoid bad logic or faulty economic reasoning.
- Deduction is based mainly on assumptions which are perfectly valid. If assumptions are wrong, generalizations made on the basis of wrong assumptions will be imperfect and invalid. All economic laws are based on too many assumptions where there is more scope for committing errors through the wrong hypotheses.
- Deductive generalizations started on the wrong premises will be dangerous when such generalizations claim universal validity. Use of such faulty generalizations while framing government policies would result in a disastrous situations. For example, J.B.Say claimed universal validity for his ‘Law of Markets’ in which he maintained that supply creates its own demand and there will not be over-production in the market. But this celebrated ‘Law of Market’ was torn to pieces when critics proved that Say’s Law was wrong and overproduction would be possible.