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The Scope and Method of Economics

The document introduces the scope and method of studying economics. It discusses that economics involves (1) microeconomics and macroeconomics, as well as diverse fields like behavioral economics and finance. It also examines (2) positive and normative approaches using theories, models, and criteria like efficiency, equity, growth and stability to analyze economic systems and policies. The document invites the reader to learn economics to understand societies and global affairs by studying individuals' choices and their aggregate outcomes.

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29 views

The Scope and Method of Economics

The document introduces the scope and method of studying economics. It discusses that economics involves (1) microeconomics and macroeconomics, as well as diverse fields like behavioral economics and finance. It also examines (2) positive and normative approaches using theories, models, and criteria like efficiency, equity, growth and stability to analyze economic systems and policies. The document invites the reader to learn economics to understand societies and global affairs by studying individuals' choices and their aggregate outcomes.

Uploaded by

SZA
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 22

The Scope and Why Study Economics?

To Learn a Way of Thinking


Method of Economics To Understand Society
To Understand Global Affairs
To Be an Informed Citizen

The Scope of Economics


Microeconomics and
Macroeconomics
The Diverse Fields of Economics

The Method of Economics


Descriptive Economics and
Economic Theory
Theories and Models
Economic Policy

An Invitation
Economics The study of how individuals
and societies choose to use the scarce
resources that nature and previous
generations have provided.

Economics is the study of how individuals and societies choose


to use the scarce resources that nature and previous generations
have provided. The key word in this definition is choose.
Economics is a behavioral, or social, science. In large measure, it
is the study of how people make choices. The choices that people
make, when added up, translate into societal choices.
Why Study Economics?
• To Learn a Way of Thinking

•Three fundamental concepts:

 Opportunity cost
 Marginalism
 Efficient markets
Why Study Economics?

• To Learn a Way of Thinking

Opportunity Cost

opportunity cost The best alternative that


we forgo, or give up, when we make a
choice or a decision.
(scarce - Limited)
Why Study Economics?

• To Learn a Way of Thinking

Marginalism
Marginalism, The process of analyzing the
additional or incremental costs or benefits
arising from a choice or decision.

Sunk Costs, Costs that cannot be avoided


because they have already been incurred.
Why Study Economics?
• To Learn a Way of Thinking

Efficient Markets—No Free Lunch

efficient market A market in which


profit opportunities are eliminated
almost instantaneously.

The study of economics teaches us a way


of thinking and helps us make decisions.
Why Study Economics?

• To Understand Society

Industrial Revolution The period in England during


the late eighteenth and early nineteenth centuries in
which new manufacturing technologies and improved
transportation gave rise to the modern factory
system and a massive movement of the population
from the countryside to the cities.

The study of economics is an essential part of the study of society.


Why Study Economics?

• To Understand Global Affairs

An understanding of economics is essential


to an understanding of global affairs.

• To Be an Informed Citizen

To be an informed citizen requires a basic


understanding of economics.
E C O N O M I C S IN PRACTI C E

iPod and the World

A sticker that says “Made in China” can often be


misleading.
Indeed, for the iPod, which is composed of many
small parts, it is almost impossible to accurately
tell exactly where each piece was produced
without pulling it apart.
From an economics point of view one often has to dig a little deeper to see what
is really going on.
The Scope of Economics

• Microeconomics and Macroeconomics

microeconomics The branch of economics that


examines the functioning of individual industries
and the behavior of individual decision-making
units—that is, firms and households.

macroeconomics The branch of economics


that examines the economic behavior of
aggregates—income, employment, output, and
so on—on a national scale.
• The Diverse Fields of Economics

TABLE 1.2 The Fields of Economics


Behavioral uses psychological theories relating to emotions and
economics social context to help understand economic decision
making and policy. Much of the work in behavioral
economics focuses on the biases that individuals have
that affects the decisions they make.
Econometrics applies statistical techniques and data to economic
problems in an effort to test hypotheses and theories.
Most schools require economics majors to take at
least one course in statistics or econometrics.

Continued...
• The Diverse Fields of Economics

TABLE 1.2 The Fields of Economics


Economic focuses on the problems of low-income countries. What can be
development done to promote development in these nations? Important
concerns of development for economists include population
growth and control, provision for basic needs, and strategies
for international trade.
Economic history traces the development of the modern economy. What
economic and political events and scientific advances caused
the Industrial Revolution? What explains the tremendous
growth and progress of post-World War II Japan? What
caused the Great Depression of the 1930s?

Continued...
• The Diverse Fields of Economics

TABLE 1.2 The Fields of Economics (continued)


Environmental studies the potential failure of the market system to account
economics fully for the impacts of production and consumption on the
environment and on natural resource depletion. Have
alternative public policies and new economic institutions been
effective in correcting these potential failures?
Finance examines the ways in which households and firms actually pay
for, or finance, their purchases. It involves the study of capital
markets (including the stock and bond markets), futures and
options, capital budgeting, and asset valuation.
The Method of Economics

positive economics An approach to economics that


seeks to understand behavior and the operation of
systems without making judgments. It describes what
exists and how it works.

normative economics An approach to economics that


analyzes outcomes of economic behavior, evaluates
them as good or bad, and may prescribe courses of
action. Also called policy economics.
The Method of Economics

• Descriptive Economics and Economic Theory

descriptive economics The compilation of data


that describe phenomena and facts.

economic theory A statement or set of related


statements about cause and effect, action and
reaction.
The Method of Economics

• Theories and Models

model A formal statement of a theory, usually a


mathematical statement of a presumed relationship
between two or more variables.

variable A measure that can change from time to


time or from observation to observation.

Ockham’s razor The principle that irrelevant detail


should be cut away.
The Method of Economics
Theories and Models
All Else Equal: Ceteris Paribus

ceteris paribus, or all else equal A device


used to analyze the relationship between
two variables while the values of other
variables are held unchanged.

Using the device of ceteris paribus is one part of the process of


abstraction. In formulating economic theory, the concept helps
us simplify reality to focus on the relationships that interest us.
The Method of Economics
Theories and Models
Expressing Models in Words, Graphs, and Equations

Methods of expressing the quantitative relationship between two variables:

 Graphing (as presented in appendix)

 Equations, for example: (Sales is a function of Advertising)

 Sales = f (Advertising)
 S = (Slope) (Advertising) + (Intercept)
 S = m (Advertising) + c
The Method of Economics

Economic Policy

Criteria for judging economic outcomes:


1. Efficiency
2. Equity
3. Growth
4. Stability
The Method of Economics
Economic Policy

Efficiency
efficiency In economics, allocative efficiency. An
efficient economy is one that produces what people
want at the least possible cost.

Equity

equity or economic equality is the concept or idea of


fairness in economics, particularly in regard to
taxation or welfare economics.
The Method of Economics
Economic Policy

Growth

economic growth An increase in the total


output of an economy.

Stability

stability A condition in which national output is


growing steadily, with low inflation and full
employment of resources.
An Invitation

You cannot begin to understand how a society functions without knowing


something about its economic history and its economic system.

Learning to think in this very powerful way will help you better understand
the world.

As you proceed, it is important that you keep track of what you have
learned in earlier chapters. This book has a plan; it proceeds
step-by-step, each section building on the last. Make sure you
understand where it fits in the big picture.

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