Transcript Chapter 1

Lecture 1: Introduction
Outline
I. What is economics?
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the main questions economics attempts to answer
economic agents of society and their economic decisions
the market: product, capital, labor
II. Microeconomics vs. Macroeconomics
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differences in subject matter
the circular flow diagram
III. Methods of economics: theory, model, data
IV. Diversities and disagreements among economists
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two causes of disagreement
normative vs. scientific economics
different schools of thought in economics
different economic systems
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What is Economics?
Economics is a social science that aims at
the study of production, distribution,
consumption and accumulation of
wealth in society.
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What is Economics?
Production: What is produced? How much? Using what method
of production / technology?
Distribution: Who takes what share of total production? How is
total wealth distributed amongst the different social groups
(such as class, race, nation, ethnic group, region, gender, etc.)
Consumption: How do individuals take their consumption vs.
savings decisions? Who consumes how much of what type of
good or service?
Accumulation: How fast does wealth accumulate (i.e.growth)?
What factors lead to fast growth? What factors hemper it? Why
do economic crises occur? How does growth translate into
improved standards of living for the people?
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Economic Agents of society and
their economic decisions
Households / Individuals as consumers and
suppliers of labor
a household (HH): group of individuals living under the same
roof and hence sharing a common budget
Firms as producers; employers of labor; and
investors, users of technology and capital
The Government as decision-maker on legal
framework and policies (fiscal, monetary, industrial and
social welfare policies, macro programs, development plans,
etc.)
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Figure 1 The Circular Flow
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Microeconomics and Macroeconomics
Microeconomics focuses on the individual parts
of the economy.
• How households and firms make decisions
and how they interact in specific markets
• HHs → consumption/savings decisions; labor supply decisions
• Firms → production decisions: what and how much to produce,
technology choice, employent of factors of production, investment
decisions.
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Macroeconomics
• Macroeconomics looks at the economy as a whole.
• Economy-wide aggregate phenomena such as
• National income
• Growth
• Inflation
• Unemployment
• Economic fluctuations (expansions and recessions)
• Savings and Investment
• Productivity
• Financial Markets: Money Supply, Interest Rates
• Open Economy Macro: International Trade, Capital
Flows, Exchange Rates, Balance of Payments
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Macroeconomics
• Macroeconomics answers questions like the
following:
• Why is average income high in some countries and
low in others?
• Why do prices rise rapidly in some time periods
while they are more stable in others?
• Why do production and employment expand in
some years and contract in others?
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The two-way relationship between
Microeconomics and Macroeconomics
Microeconomic decisions of individual agents
when they come together in the aggregate make
up the macroeconomics phenomena.
IN TURN;
Macroeconomic phenomena affect the indivdual
consumption and labor supply decisions; and
the firm production decisions.
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Introduction--The Issues and Approach
of Macroeconomics
• Three time-frames of macroanalysis
• Short-run
• Medium-run
• Long-run
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The Methods of Economics as a Science:
Observation, Theory, Data Analysis, and
More Observation
Theories, Models, Data
• Observes real world events to develop theories
about how a complex, real world operates;
• Builds models to explain specific economic
relationships;
• Makes simplifying assumptions in building the
models;
• Collects and analyzes data to evaluate the
models and the theories.
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POSITIVE VERSUS NORMATIVE
ANALYSIS
• Positive statements are statements that
attempt to describe the world as it is.
• Called descriptive analysis
• Normative statements are statements about
how the world should be.
• Called prescriptive analysis
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POSITIVE VERSUS NORMATIVE
ANALYSIS
• Positive or Normative Statements?
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• An increase in the minimum wage will cause a
decrease in employment among the least-skilled.
?
• Higher government budget deficits will cause
interest rates to increase.
?
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POSITIVE VERSUS NORMATIVE
ANALYSIS
• Positive or Normative Statements?
?
• The income gains from a higher minimum wage are
worth more than any slight reductions in
employment.
?
• The government should be allowed to collect from
tobacco companies the costs of treating smokingrelated illnesses among the poor.
?
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WHY ECONOMISTS DISAGREE
• Scientific reasons: They may disagree
about the validity of alternative positive
theories about how the world works.
• Value judgements: They may have
different values and, therefore, different
normative views about what policy should
try to accomplish.
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Different Schools of Thought in
Economics
The mainstream school of thought:
Neoclassical Economics
Non-mainstream schools of thought:
Keynesian Economics
Marxian Economics
Institutionalist Economics
Structuralist Economics
Feminist Economics
....and so on.
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Economic Systems
(from B. Üstünel, Ekonominin Temelleri; Section 4; Economic Systems )
Philosophical Foundations
Capitalism •Liberalism
Institutional
Framework
•Individualism
•Utility-disutility motivation
•Private property and
contracts
•Market mechanism and
price signals
Socialism
•Desire to control its own destiny
•Collectivism
•Service-welfare motivation
•Collective ownership of
means of production
•Central planning
Mixed
Economy
•Desire to live freely
•Individual-society relations
•Desire for social security
•Limited private property
and contracts
•Democratic planning
and social welfare state
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