Copyright © 2004 South-Western/Thomson Learning Lecture 1: Introduction Outline I. What is economics? the main questions economics attempts to answer economic

Copyright © 2004 South-Western/Thomson Learning

Lecture 1: IntroductionOutline

I. What is economics?• the main questions economics attempts to answer• economic agents of society and their economic decisions• the market: product, capital, labor

II. Microeconomics vs. Macroeconomics• differences in subject matter• the circular flow diagram

III. Methods of economics: theory, model, dataIV. Diversities and disagreements among economists

• two causes of disagreement• normative vs. scientific economics• different schools of thought in economics• different economic systems


What is Economics?

Economics is a social science that aims at the study of production, distribution,

consumption and accumulation of wealth in society.


What is Economics?

Production: What is produced? How much? Using what method of production / technology?

Distribution: Who takes what share of total production? How is total wealth distributed amongst the different social groups (such as class, race, nation, ethnic group, region, gender, etc.)

Consumption: How do individuals take their consumption vs. savings decisions? Who consumes how much of what type of good or service?

Accumulation: How fast does wealth accumulate (i.e.growth)? What factors lead to fast growth? What factors hemper it? Why do economic crises occur? How does growth translate into improved standards of living for the people?


Economic Agents of society and their economic decisions

Households / Individuals as consumers and suppliers of labor

a household (HH): group of individuals living under the same roof and hence sharing a common budget

Firms as producers; employers of labor; and investors, users of technology and capital

The Government as decision-maker on legal framework and policies (fiscal, monetary, industrial and social welfare policies, macro programs, development plans, etc.)


Figure 1 The Circular Flow


Microeconomics and Macroeconomics

Microeconomics focuses on the individual parts of the economy.

• How households and firms make decisions and how they interact in specific markets

• HHs → consumption/savings decisions; labor supply decisions• Firms → production decisions: what and how much to produce,

technology choice, employent of factors of production, investment decisions.


Macroeconomics

• Macroeconomics looks at the economy as a whole. • Economy-wide aggregate phenomena such as

• National income• Growth• Inflation• Unemployment• Economic fluctuations (expansions and recessions)• Savings and Investment• Productivity• Financial Markets: Money Supply, Interest Rates• Open Economy Macro: International Trade, Capital

Flows, Exchange Rates, Balance of Payments


Macroeconomics

• Macroeconomics answers questions like the following:• Why is average income high in some countries and

low in others? • Why do prices rise rapidly in some time periods

while they are more stable in others? • Why do production and employment expand in

some years and contract in others?


The two-way relationship between Microeconomics and Macroeconomics

Microeconomic decisions of individual agents when they come together in the aggregate make up the macroeconomics phenomena.

IN TURN;

Macroeconomic phenomena affect the indivdual consumption and labor supply decisions; and the firm production decisions.

Copyright © 2004 South-Western/Thomson LearningSlide #10

IntroductionIntroduction--The Issues and Approach of Macroeconomics

• Three time-frames of macroanalysis• Short-run• Medium-run• Long-run


The Methods of Economics as a Science: Observation, Theory, Data Analysis, and More Observation

Theories, Models, Data

• Observes real world events to develop theories about how a complex, real world operates;

• Builds models to explain specific economic relationships;

• Makes simplifying assumptions in building the models;

• Collects and analyzes data to evaluate the models and the theories.


POSITIVE VERSUS NORMATIVE ANALYSIS

• Positive statements are statements that attempt to describe the world as it is.

• Called descriptive analysis

• Normative statements are statements about how the world should be.

• Called prescriptive analysis


• Positive or Normative Statements? • An increase in the minimum wage will cause a

decrease in employment among the least-skilled.

• Higher government budget deficits will cause interest rates to increase.?

?POSITIVE VERSUS NORMATIVE

ANALYSIS

?


• Positive or Normative Statements? • The income gains from a higher minimum wage are

worth more than any slight reductions in employment.

• The government should be allowed to collect from tobacco companies the costs of treating smoking-related illnesses among the poor.

?

?POSITIVE VERSUS NORMATIVE

ANALYSIS

?


WHY ECONOMISTS DISAGREE

• Scientific reasons: They may disagree about the validity of alternative positive theories about how the world works.

• Value judgements: They may have different values and, therefore, different normative views about what policy should try to accomplish.


Different Schools of Thought in Economics

The mainstream school of thought: Neoclassical Economics

Non-mainstream schools of thought:Keynesian EconomicsMarxian Economics

Institutionalist EconomicsStructuralist Economics

Feminist Economics....and so on.


Economic Systems(from B. Üstünel, Ekonominin Temelleri; Section 4; Economic Systems )

Philosophical Foundations Institutional Framework

Capitalism •Liberalism

•Individualism

•Utility-disutility motivation

•Private property and contracts

•Market mechanism and price signals

Socialism •Desire to control its own destiny

•Collectivism

•Service-welfare motivation

•Collective ownership of means of production

•Central planning

Mixed Economy

•Desire to live freely

•Individual-society relations

•Desire for social security

•Limited private property and contracts

•Democratic planning and social welfare state

Documents

Copyright © 2004 South-Western/Thomson Learning Lecture 1: Introduction Outline I. What is economics? the main questions economics attempts to answer economic