Transcript Economics

The Nature of Economics
and Methodology of
Research
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Define Economics
Explain the five big questions that
economists seek to answer
Explain eight ideas that define the economic
way of thinking
Describe how economists go about their work
Economics is the social science that analyzes
the production, distribution, and consumption
of goods and services. The term economics
comes from the Ancient Greek οἰκονομία
(oikonomia, "management of a household,
administration") from οἶκος (oikos, "house") +
νόμος (nomos, "custom" or "law"), hence "rules
of the house(hold)"
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Scarcity of resources: Society’s wants exceed
the resources available to satisfy them.
Economics is the science of choice — the
science that explains the choices that we
make and how those choices change as we
cope with scarcity.
Alfred Marshall. Principles of Economics
(1890):
“…a study of mankind in the ordinary business
of life; it examines that part of individual and
social action which is most closely connected
with the attainment and with the use of the
material requisites of wellbeing.
 Political
economy originally was
the term for studying production,
buying, and selling, and their
relations with law, custom, and
government, as well as with the
distribution of national income
and wealth, including through the
budget process.
Classical Political Economy
Sir William Petty: A Treatise of Taxes and Contributions
(1662) - he is attributed as having started the
philosophy of 'laissez-faire' in relation to government
activity.
Adam Smith: An Inquiry into the Nature and Causes of
the Wealth of Nations. (1776) – “invisible hand”,
division of labor, absolute advantage in foreign trade.
David Ricardo - Principles of Political Economy and
Taxation (1817) – comparative advantage in foreign
trade, labor theory of value
Karl Marx: The Capital (Volumes I-IV, 1867-1894)
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Define Economics
Explain the five big questions that
economists seek to answer
Explain eight ideas that define the
economic way of thinking
Describe how economists go about their
work
What?
How?
When?
Where?
Who?
What goods and services are produced and in
what quantities?
Do we produce houses or cars, food or
entertainment, gasoline or plastics, private goods
or public goods, weapons or medical services, etc.?
How are goods and services produced?
Do we use labor or machines to
produce the goods we want?
Manual with simple instruments
versus
automated
or
even
robotized technologies?
When are goods and services produced?
Do we increase or decrease
production?
Ahead of the change in demand
or following the demand
changes?
Where are goods and services produced?
Do we produce the goods in Bulgaria, the U.S. or
in China?
Next to the raw materials or thousand of
kilometers away: for instance, extracting bauxite
in Australia and producing aluminum in Germany,
drilling crude oil in Saudi Arabia but refining the
oil in the USA or in the UK.
Who consumes the goods and services that
are produced?
Do we sell our goods to the wealthy, or the poor?
Does it matter or the only important thing is the
volume of income? Is there any difference in
answering this question from the producers,
consumers, and the society as a whole?
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Define Economics
Explain the five big questions that
economists seek to answer
Explain eight ideas that define the
economic way of thinking
Describe how economists go about their
work
The questions give you a sense of what
economics is about.
The Big Ideas of Economics describe how
economists think about these questions and
seek answers to them.
IDEA 1
A choice is a tradeoff — we
give up something to get
something else — and the
highest valued alternative we
give up is the opportunity cost
of the activity chosen.
IDEA 2
We make choices in small steps, or at
the margin, and choices are
influenced by incentives.
 Marginal Benefit vs. Marginal Cost
 Incentives are inducements to take
particular actions
IDEA 3
Voluntary exchange makes both
buyers and sellers better off, and
markets are an efficient way to
organize exchange.
 Buyers receive goods or services
 Sellers receive money.
IDEA 3 (cont.)
Markets are efficient because they
ensure that resources will be used
where they are valued most highly.
Alternative to Market Economy
Command Economy
IDEA 4
The market does not always work efficiently and
sometimes, government action is necessary to
overcome market failure and lead to a more efficient
use of resources.
Market failure is a state in which the market does not
use resources efficiently.
IDEA 5
For the economy as a whole,
expenditure equals income
equals
the
value
of
production.
IDEA 6
Living standards improve when production per
person increases (labor productivity).
This increase in output per person will enable more
people to own goods and services.
IDEA 7
Inflation occurs when the quantity of money
increases faster than production.
Inflation results from “too much money chasing too
few goods.”
IDEA 8
Unemployment can result from market failure but
some unemployment (natural unemployment) is
productive.
 Unemployment rates vary.
 Some unemployment results from employees searching
for a suitable job and employers searching for suitable
workers. This unemployment improves productivity.
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Define Economics
Explain the five big questions that
economists seek to answer
Explain eight ideas that define the
economic way of thinking
Describe how economists go about their
work
Microeconomics, Macroeconomics and
International Economics
Microeconomics is the study of individual people
(households) and businesses and the interaction of
those decisions in markets.
Studies:
 Prices and Quantities
 Effects of government regulation and taxes
Macroeconomics is the study of the national
economy and the global economy as a whole.
Studies:
 Average prices and total employment, income, and
production
 Effects of taxes, government spending, a budget
deficits on total jobs and incomes
 Effects of money and interest rates
International Economics:
foreign trade, competitiveness on the world
market place, international capital flow and
international
capital
markets,
foreign
exchange mechanisms, economic integration
(EU, NAFTA), interaction with the IMF, World
bank and other international financial
institutions
Economists attempt to discover an
explanation for how economic systems work.
Economists distinguish between Positive
Statements and Normative Statements
Positive statements are about what is.
◦ Can be proven right or wrong.
◦ Can be tested by comparing it to facts – inflation
leads to lower purchasing power, recession increases
unemployment, foreign investments stimulate the
economic
development
and
lower
the
unemployment, etc..
Normative statements are about what ought to be.
◦ Depend upon personal values and cannot be tested.
Objective
Discover and catalog positive statements that are
consistent with what we observe in the world and
that enable us to understand how the economic
world works.
Steps
◦ Observation and Measurement
◦ Model Building
◦ Testing
Unscrambling Cause and Effect
Ceteris Paribus
Fallacy of Composition
The statement that what is true of the parts is true
of the whole or what is true of the whole is true of
the parts.
Post Hoc Fallacy
The error or reasoning that a first event causes a
second event because the first occurred before the
second.