There are two methods of economics

1. Deductive method
2. Inductive method

Deductive method- classical economists favour this method. It is also known as hypothetical or abstract or priori or analytical method. Under this method there are following steps:

1. Observation of already existing truth or principles is taken
2. The next step is defining technical terms and making assumptions to set aside the non cooperating variables
3. Derivation of hypothesis
4. Testing of hypothesis
5. Statement of law

Its movement is from general to particular or universal to one. Most of micro economics laws are based on this method like law of demand, law of supply

Under this method laws are deduced logically. Conclusions are drawn from certain fundamental assumptions which have been established. This method is based on abstract reasoning not on actual facts. For example, it is assumed that man is rational and on the basis of this it is deduced that he will buy cheap and sell dear but in actual situation due to absence of proper knowledge this may not happen.

Inductive method- under this method conclusions are drawn on the basis of collection and analysis of facts relevant to inquiry.  This method is also known as historical or concrete, or realistic or empirical or posteriori. This method was first employed by German historical school. Under this method there is following steps:

1. Collection of data
2. Arrangement of data
3. Analysis of data
4. Derivation of data
5. Testing of hypothesis

Its movement is from particular to general, one to universal. Most of macro economics laws are based on this method like consumption function, investment function. This method insists on the experimental facts and then general principals. It leads to exact conclusions. It shows that laws are valid only under certain conditions.

At the end we can say that the two methods go side by side the conclusions drawn from deductive method are verified by inductive method of observing concrete facts of life.