PPT 1

• Economics and Its Importance


  • Macroeconomics & Microeconomics
  • Use of Theories & Models to Understand Economic Issues
  • Overview of Economic Systems
• Economics


  • A social science concerned with man's problem of issuing scarce resources to satisfy unlimited wants
  • The study of how society manages its scarce resources
  • The study of how humans make decisions in the face of scarcity
• Scarcity


  • Human wants for goods, services and resources exceed what is available
  • Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply
  • Time - everyone, rich or poor, has just 24 expendable hours in the day to earn income to acquire goods and services, for leisure time, or for sleep
  • At any point in time, there is only a finite amount of resources available
• Why study Economics

  • A basic understanding of economics makes you a well-rounded thinker
  • Economics provides the tools to solve problems
  • Every major problem facing the world today has an economic dimension
• Macroeconomics


  • Looks at the economy as a whole
  • Focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports
• Microeconomics


  • Focuses on the actions of individual agents within the economy, like households, workers, and businesses
  • Looks at the decision of individuals
  • Looks at how prices are determined
  • Concerned with Social welfare
  • Has limited focus
  • Helps develop logical reasoning
  • Helps develop skills in the construction and use of models
  • Employs optimizing techniques that are useful for making decisions in different situations
  • Concepts studied in microeconomics are applicable to personal resource allocation decisions, such as your career choices or financial investments
• Positive economics


  • Analysis of facts or data to establish scientific generalization about economic behavior
  • Focuses on facts and cause and effect relationships
  • Concerned with what is
  • Avoids value judgement, tries to establish scientific statements about economic behavior, and deals with what the economy is actually like
• Normative economics


  • Involves value judgement about what the economy should be like
  • Usually involve in public policy
  • Embodies subjective feelings about what ought to be
  • Looks at the desirability of the certain aspects of the economy
  • Underlies expressions of support for particular economic policies
• John Maynard Keynes


  One of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking

  
• Scientific method


  The systematic pursuit of knowledge through the formulation of a problem, collection of data, and the formulation and testing of hypothesis to obtain theories, principles and laws
• Economic analysis


  The process of directing economic relationships among economic behavior and events and determining the causal relationships among the data and activities observed
• Deductive method


  • Consists in deriving conclusions from general truths, takes few general principles and applies them draw conclusions
• Merits of deductive method


  • Near to reality, less time consuming and less expensive
  • Use of mathematical techniques brings exactness and clarity
  • Limited scope of experimentation, helps in deriving economic theories
  • Simple because it is analytical
• Demerits of deductive method


  • Underlying assumptions may be invalid, leading to misleading conclusions
  • Highly abstract, requires care to avoid bad logic or faulty economic reasoning
  • Facile conclusions due to reliance on imperfect and incorrect assumptions
• Inductive method


  • Involves the process of reasoning from particular facts to general principle
  • Derives economic generalizations based on experimentation, observations and statistical methods
  • Steps: Observation, Formation of hypothesis, Generalization, Verification
• Merits of inductive method


  • Based on facts, so realistic
  • Uses statistical techniques, so more reliable
  • Dynamic, changing economic phenomenon are analyzed
  • Helps in future investigations
• Demerits of inductive method


  • Conclusions drawn from insufficient data may be faulty
  • Data collection is difficult and time-consuming
  • Time-consuming and expensive
• Inductive method


  It is based on facts, makes statistical techniques, and is more reliable
• Inductive method

  • It is realistic
  • It is dynamic - changing economic phenomena are analyzed and conclusions are drawn from collected data
  • It helps in future investigations
• Demerits of inductive method


  • Conclusions drawn from insufficient data may be faulty
  • Data collection is not easy, results may differ even with the same problem
  • It is time-consuming and expensive
• Both inductive and deductive methods have weaknesses, modern economists view them as complementary rather than rivals
• Economists use statistics to quantitatively describe economic behavior and test hypotheses
• Economists use mathematics to conceptualize and quantify hypotheses for empirical validation
• Purposes of economic analysis

  • Aid in understanding how the economy operates
  • Permit the production of results of changes in economic variables
  • Serve as basis for policy formulation
• Economic policy


  Intervention or courses of action taken by government or private institutions to manipulate the results of economic activity
• Steps in the construction of economic theory

  1. Specification and definition of postulates

  2. Observation of facts

  3. Application of logic to observed facts

  4. Testing the hypothesis
• Functions of economic theory


  • Explain the nature of economic activity
  • Predict what will happen to the economy if facts change
• Economic models


  Composed of statements of assumptions or implications of deduction
• Economic models


  • Supply and demand model
  • QS=QD
  • QS=500P
• Circular flow diagram


  Pictures the economy as consisting of households and firms interacting in goods/services and labor markets
• Factor market


  A market in which households sell and firms buy factors of production
• Product market


  A market in which products are sold by firms and bought by households
• Traditional economy


  • Oldest economic system, occupations stay in the family, little economic progress or development
• Command economy


  • Economic effort devoted to goals passed down from ruler/ruling class, government decides production, prices, and wages, provides many necessities for free
• Market economy


  • Decentralized structure, based on private enterprise and consumer demand, income based on ability to convert resources into valued output
• Mixed economy


  • Combines elements of command and market systems
• There is no such thing as an absolutely free market, regulations always define the "rules of the game" in the economy
• Even the most command-oriented economies operate using markets
• Globalization has evolved due to growth in commercial and financial networks crossing national borders, making businesses and workers increasingly interdependent