Deductive method

It is also known as the abstract, analytical and priori method. It is not based on facts but based on theoretical rational and it follows a process of logical deductions wherein the logic proceeds from general assumptions to particular predictions. Based on certain fundamental assumption or truth established from prior generations, conclusions are drawn. Then, these predictions are tested and verified before they are established as theories of economics. The main steps to derive economic generalisations under this method are:
• Perception of the problem
• Defining the technical terms and making appropriate assumptions
• Deducing the hypothesis
• Testing of the hypothesis deduced
Example:

The general assumption is that man is rational; therefore, it is predicted that he would buy cheap and sell dear. But this may not be true because of the absence of proper knowledge of the market conditions.

Merits
• This theory does not require detailed analysis and collection of data and hence, is considered to be less time consuming and less expensive
• It enables economists to arrive at accurate economic principles and theories as it uses various mathematical techniques
• It is universally applicable
Demerits
• It is not dependable as the fundamental assumptions may turn out to be untrue
• Faulty economic reasoning is another major drawback

Inductive method

It is also called the Empirical Method. Here, the logic proceeds from particular facts to general theories. Three ways can be followed to arrive at economic principles and theories viz., experimentation, observation and use of statistical methods.

Example:

when the income of an individual increases, his saving capacity also increases. This particular behaviour is used to formulate a general theory, is known as Inductive method.

The principal steps under this method are:

• Perception of the problem
• Collection, classification and analysis of data by using appropriate statistical techniques
• Finding out the reasons for the relationship established through statistical analysis and to set rules for the verification of the principles
Merits
• It is scientific in nature as it is based on facts and not on mere assumptions
• It shows that the generalizations are valid only under certain situations
• It leads to precise and measurable conclusions
Demerits
• It is time consuming as the collection of facts becomes difficult
• Since human behaviour is unpredictable, observation and experimentation have a limited role
• Due to availability of insufficient facts, there is a risk of drawing hurried conclusions
However, the two methods are not mutually exclusive. They are used together in any scientific inquiry. Conclusions drawn from deductive method of reasoning are verified by inductive method of observing concrete facts.  