History of economic thought Short characteristic of economics

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Transcript History of economic thought Short characteristic of economics

History of economic thought
Short characteristic of economics
Petr Wawrosz
Term „economy“ or „economics“
• Word „economy“ comes from Greek word
• Oikonomos = one who manages a household.
• What does have the household and
economics common?
Household faces decision
• Which members of the household do which task
and what each member gets in return.
• Examples (economic question that a household
- Who cooks dinner?
- Who does the laundry?
- Who gets the extra dessert at dinner?
- Who gets to choose what TV show to watch?
• Household must allocate its scare resources
among its various member, taking into account
each member´s abilities, efforts and desires.
Society faces decision too
• Society must decide what jobs will be done
and who will do them.
• Economic question the society faces:
What goods will be produced?
How the goods will be produced?
Who will receive the produced goods?
• Economic as the science gives answer how the
different society solves above mentioned
problems and what solutions are better.
• Fundamental concept of economics that indicates that
there is less of a good freely available from nature than
people would like.
• Scarcity does not mean poverty!
Scarcity – objective concept. Poverty subjective
• Scarcity leads to competitive behavior!
• Scarcity is „beyond“ basic economic questions!
Economic system
• Different ways how the main economic
question are solved.
• Traditional
• Command
• Pure market
• Mixed
Economics system
• Traditional: based on tradition, custom and
habits both in production and division of
produced goods and services.
• Usually no private property. Common
Economics system
• Command economy or centrally planned
what how and for whom to produce is decided
by some authority.
Economics system
• Pure market economy:
• Decision of any economic subject depends on
their will, skills and possibilities.
• Government does not intervene in economy
(does not offer some goods and so on), only
provides legal structure.
Economics system
• Mixed economy:
combined significant elements of market and
command system (and may be of traditional
• Government offers some goods, intervenes on
some markets and so on.
Definition of economics
• Economics is the science which studies human
behavior as the relationship between ends
and scare means which have alternative uses.
(Lionel Robbins, 1932).
• Economics is a part of social science and
studies how people behave to satisfy their
needs. (Hubbard and O´Brien, 2010).
Definition of economics
• Economics is a study of how people organize the
use of resources to satisfy their wants. (J. Sickle
• Economics is study how people allocate their
limited resources in an attempt to satisfy their
unlimited wants. As such, economics is the study
how people make choices and how their choices
affect their environment. (R. Miller 2012).
Definition of economics
• In short, economist seeks to understand how well the
market economy works and to identify where
government may need to intervene to correct specific
aspect of market failure. (Lipsey and Chrystal, 2007)
• Which economic system is the best one?
• Market system: self-organization, efficient
organization, based not on benevolence but on selfinterest. Self-interest produces a outcome convenient
for other people (A. Smith „invisible hand“).
• Market failure.
• Advantages and disadvantages of other systems.
Definition of economics
• Economics has been called “The Dismal
Science.” But it's also been called “the science
of how people get a living.” Our daily lives are
beset with economic questions! (Henry
George, about 2000)
• Economics is a study of mankind in the
ordinary business life. (Alfred Marshall, 1890).
• Microeconomics is the study of how households
and firms make choices, how they interact in
markets and how government attempts to
influence their choices.
- e.g. how consumers and producers respond to
changes in prices, income and other facts or
• Try to find the most efficient way (e.g. in reducing
smoking, drug policy, global warming)
• Macroeconomics is a the study of economics as a
whole, including topics such as inflation,
unemployment and economic growth.
• It tries for instance to explain:
- why economies experience period of recessions
and booms,
- why in long run some economies have grown
much faster than others,
- whether the government intervention can
improve economic condition.
Individual and collective choice
• Economics is about individual choice.
• People often group to form collective
• Individual choices still underlie and direct the
decision made within organization.
• Macroeconomic aggregates (GDP, inflation, …)
depend on in many individual choices.
Topics of economics
Consumer and his/her behavior
Producer and its behavior
Equilibrium on specific market
Characteristic of markets – perfect and imperfect
Market of factors of production
Capital market (market of lending funds)
Microeconomic general equilibrium theory
Public sector economics, market failures
Government intervention, economic efficiency
Topics of economics
Economic growth
Aggregate expense
• Aggregate supply
• Macroeconomic
• Business cycle
• International
economics, exchange
• Fiscal policy
• Monetary policy
Some important economic terms
Firm, company, business
Revenue (total, average,
• Cost (total, average,
marginal, fixed, variable,
explicit, implicit,
opportunity, sunk)
Profit (economic,
Factors of production
Physical capital
Human capital
Social capital
Positive versus normative economics
• Positive economics: what is among economic
The statements are only about actual or alleged
• Normative economics: what ought to (should) be,
what is good or bad.
The value judgments are necessary to assess the
truth of statement.
• See:
Positive statements
Normative statements
Higher interest rates cause people
to save more.
People should save more.
High income tax rate discourage
Governement should tax the rich
to help the poor.
High taxes on cigarettes discourage Smoking should be discouraged.
Roaduse charge would increase
The tax system should be used to
reduce traffic.
People are more worried about
inflation than unemployment.
Technical chance is a bad thing
because it puts some people out of
The burning of fossil fuels is
causing global warming.
Government should do more to
reduce carbon emissions in order
to save the planet from global
Why do economists often disagree
• Different benchmark
• Differences between short and long
• It is not clear by what factors a output was
caused. The importance of the specific factor.
• Different values.
• Economics is one of the youngest sciences
known to man.