Transcript History of economic thought Short characteristic of economics

History of economic thought
Short characteristic of economics
Petr Wawrosz
What economics mean
Term „economy“ or „economics“
• Word „economy“ comes from Greek word
„oikonomos“
• 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
faces):
- 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.
Scarcity
• 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
concept.
• 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
property.
Economics system
• Command economy or centrally planned
economy:
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
system).
• Government offers some goods, intervenes on
some markets and so on.
Possible definitions of economics
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
1954).
• 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 and
macroeconomics
Microeconomics
• 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
incentives.
• Try to find the most efficient way (e.g. in reducing
smoking, drug policy, global warming)
Macroeconomics
• 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
organizations.
• Economics analyzes how collective
organizations make a choice.
• Macroeconomic aggregates (GDP, inflation, …)
depend on in many individual choices.
Some topics of economics
Topics of economics
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Consumer and his/her behavior
Producer and its behavior
Equilibrium on specific market
Characteristic of markets – perfect and imperfect
competition
Market of factors of production
Capital market (market of lending/loanable funds)
Microeconomic general equilibrium theory
Public sector economics, market failures
Government intervention, economic efficiency
Topics of economics
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GDP
Economic growth
Money
Inflation
Unemployment
Aggregate expense
(demand)
• Aggregate supply
• Macroeconomic
equilibrium
• Business cycle
• International
economics, exchange
rate
• Fiscal policy
• Monetary policy
Some important economic terms
Some important economic terms
• Revenue (total, average,
marginal)
• Utility
• Scarcity
• Entrepreneur
• Firm, company, business
• Goods
• Services
• Technology
• Innovations
• Factors of production (labor,
capital, land and natural
resources)
• Physical capital
• Human capital
• Social capital
• Cost (total, average, marginal,
fixed, variable, explicit, implicit,
opportunity, sunk)
• Profit (economic, accounting)
• Household
• Production Possibility Frontier
• Efficiency
• Productive efficiency
• Allocative Efficiency
• Absolute advantages
• Comparative advantages
Some important economic terms
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Market
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Product market
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Factor market
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Loanable market
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Demand
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Price
Quantity demanded
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Income effect
Substitution effect
Movement along demand
Shift of demand
Elasticity
Elastic, inelastic, unit
elasticity
Price elasticity of demand
Income elasticity of
demand
Cross price elasticity of
demand
Some important economic terms
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Supply
Price
Quantity supplied
Movement along demand
Shift of demand
Elasticity
Inelastic supply
Some important economic terms
• Market equilibrium •
• Surplus in the market •
• Shortage in the
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• Minimum price (price •
floor)
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• Minimum wage (price
ceilings)
Maximum price
Menu cost
Consumer surplus
Producer surplus
Deadweight loss
Black market
Some important economic terms
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Rivalry
Excludability
Private goods (rivalrous and excludable)
Public goods
Quasi-public goods
Common resources
Tragedy of Commons
Some important economic terms
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Externalities
Positive externalities
Negative extenalities
Private and social benefit
Private and social cost
Transaction cost
Coase theorem
Positive and normative economics
Positive versus normative economics
• Positive economics: what is among economic
relationships.
The statements are only about actual or alleged facts.
• Normative economics: what ought to (should) be, what
is good or bad.
The value judgments are necessary to assess the truth
of statement.
• See:
- http://www.youtube.com/watch?v=aZEP1ii1UmI
- http://www.youtube.com/watch?v=ODYE_KaLjA0
Positive statements
Normative statements
Higher interest rates cause people
to save more.
People should save more.
High income tax rate discourage
effort.
Governement should tax the rich
to help the poor.
High taxes on cigarettes discourage Smoking should be discouraged.
smoking.
Roaduse charge would increase
traffic.
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
work.
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
consequences.
• 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.
The consequences of
disagreement of economists
• Economics is the only field in which two
people can get a Nobel Prize for saying exactly
the opposite thing.
Some economists and other people
connected with issues mentioned
in presentation
Antic philosophers
• Xenophon 430 – 354
• Plato 428/427 or 424/423 BCE – 348/347 BCE
• Aristotle 384–322 BCE
• Used term „„oikonomos“
• Wrote about managing household
Adam Smith
• 1723 – 1790
• An Inquiry into the Nature and Causes of the
Wealth of Nations (1776)
• Founder of economics as a science
• Formed main economic problems and questions
• Scarcity
• Utility
• Divison of labour
Invisible hand
• As every individual, therefore, endeavours as much as he can both
to employ his capital in the support of domestic industry, and so to
direct that industry that its produce may be of the greatest value;
every individual necessarily labours to render the annual revenue of
the society as great as he can. He generally, indeed, neither intends
to promote the public interest, nor knows how much he is
promoting it. By preferring the support of domestic to that of
foreign industry, he intends only his own security; and by directing
that industry in such a manner as its produce may be of the
greatest value, he intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote an end which
was no part of his intention. Nor is it always the worse for the
society that it was no part of it. By pursuing his own interest he
frequently promotes that of the society more effectually than when
he really intends to promote it.
Invisible hand
• It is not from the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner,
but from their regard to their own interest. We
address ourselves, not to their humanity but to
their self-love, and never talk to them of our own
necessities but of their advantages.
• See: http://www.youtube.com/watch?v=ulyVXau4wE
David Ricardo
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1772 – 1823
Theory of comparative advantage
Supporter of free international trade
Fighter again Corn Laws
Alfred Marshall
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1842 – 1924
Founder of modern microeconomics
Supply, Demand, Marshall´s scissors
Utility, scarcity
Marginal utility, marginal cost
Market Equilibrium …
• 1890: Principles of Economics
John Maynard Keynes
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1883 – 1946
Founder of modern macroeconomics
Aggregate demand
Theory of money
Unemployment
• The General Theory of Employment, Interest
and Money (1936)
Simon Kuznets
• 1901 – 1985
• Founder of methods how to calculate GDP
• National accounting
Arthur Cecil Pigou
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1877 – 1959
Externalities, public goods
Consumer surplus, producer surplus
Welfare economics
Ronald Coase (1910 – 2013)
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Externalities
Public goods (light house)
Transaction costs
The nature of firm