Introduction to Economics Lecture 1 PDF

University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 Lecture 1: The nature and scope of economics What is Economics? Economics aims t...

University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 Lecture 1: The nature and scope of economics What is Economics? Economics aims to understand how real-world economic systems function at various levels, from global and national scales to specific industries and local contexts. Despite numerous efforts, a precise definition of economics has yet to be established, many align with Alfred Marshall's view that economics is "the study of mankind in the ordinary business of life," focusing on how individuals and societies acquire and use material necessities for well-being. Despite the challenge of defining economics, identifying the core questions it addresses is less difficult. Economists study the forces that determine prices, not only of goods and services but also of the resources used in their production. Their analysis revolves around how labour, machinery, and land are combined in production, as well as how buyers and sellers interact within markets. Additionally, economists explore how the "price system" or "market mechanism" functions and the conditions that sustain it. Why Study Economics? To understand society. The industrial revolution of the late 18th and early 19th centuries introduced new manufacturing technologies and improved transportation, leading to the rise of the modern factory system and mass migration from rural areas to cities. Studying economics is crucial for understanding these societal changes. Studying economics today is crucial because it helps us understand how resources are allocated in a world with limited supply and growing demand. It equips individuals and policymakers with tools to address key challenges like inflation, unemployment, and inequality. By analyzing economic trends and market mechanisms, we can make informed decisions that promote sustainable growth, improve living standards, and adapt to a rapidly changing global economy. Historical Development of Economics : The history of economics spans many centuries, with influential figures, theories, and books. However, modern economic thought is generally considered to have emerged over the past 300 years. The word “economics” comes from the Greek terms "oikos" (household) and "nemein" (to manage), originally referring to household management. It was initially called political economy, with Antoine de Montchrétien being the first to use the term in 1615. Alfred Marshall later popularized "economics" in his 1890 book Principles of Economics. University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 Adam Smith, often regarded as the father of modern economics, published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, which marked the formal establishment of economics as a distinct field. Smith is also known for advocating minimal government intervention in markets. A generation after Smith, David Ricardo published Principles of Political Economy and Taxation in 1817. He is renowned for his law of comparative advantage, which became a cornerstone of 19th-century free trade theory. Karl Marx, a leading critic of capitalism, is perhaps best known for his support of socialism and communism. He introduced the “theory of surplus value,” which argues that human labor is the sole source of value and profit. Alfred Marshall emphasized microeconomics and the need for economics to rely more on mathematics than philosophy. His book Principles of Economics remains one of the most influential economic texts. In the 20th century, John Maynard Keynes challenged free-market principles, advocating for government intervention to mitigate economic downturns. His ideas continue to influence economic policy, as seen in government bailouts during recessions. Difference between political economics and economics: Alfred Marshall's economics focuses on the study of individual and social behavior in the "ordinary business of life," examining how people acquire and use material resources to improve their well-being. In contrast, political economy, as proposed by Christian de Monchréstien in the early 17th century, was more concerned with the management of a nation’s wealth. It integrated economics with politics, ethics, and law, viewing economic activity as a tool for strengthening the state and ensuring public welfare. Political economy focused on broader societal and governmental issues, while Marshall’s economics zoomed in on individual actions and market forces. The distinction between political economy and economics helped separate politics from economics as distinct disciplines. It viewed economic decisions as inherently linked to governance and state interests. This change separated economics from the political sphere by treating it as a more scientific, neutral discipline that analyzed market behavior without direct involvement in political decision-making. Thus, politics became the domain of governance and power, while economics focused on understanding markets and resource allocation independently. University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 Brief definitions Adam Smith: "Economics is the study of wealth." Smith, often called the "father of modern economics," focused on how nations build wealth through production, trade, and markets. Alfred Marshall: "Economics is the study of man in the ordinary business of life." Marshall emphasized both the production and consumption of wealth, as well as human behavior in daily life, bringing together supply and demand. Lionel Robbins: "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses." Robbins defined economics as the study of how individuals make choices when faced with limited resources. John Maynard Keynes: "Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." Keynes viewed economics as a tool to understand and solve economic issues, focusing on how economies function, especially during times of crisis like recessions. Paul Samuelson: "Economics is the study of how people and society choose, with or without the use of money, to employ scarce productive resources that could have alternative uses." Samuelson, a key figure in modern economics, emphasized decision- making in the use of scarce resources. Microeconomics and macroeconomics Economics is the study of how goods and services are produced, distributed, and consumed. It examines the decisions people make and the reasons behind those choices when buying products. Economics is divided into two main areas: microeconomics and macroeconomics. Microeconomics focuses on individual or business-level behavior, exploring how people and companies act in response University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 to limited resources and government policies, covering topics like supply and demand, price elasticity, and quantity changes. Macroeconomics, on the other hand, looks at the broader economy, studying large-scale factors such as inflation, international trade, unemployment, and national economic output. Methods, Types and Models: Methods: The usual methods of scientific studies — deduction and induction, are available to the economist. Both methods come from science, the deductive method involves reasoning from a few fundamental propositions, the truth of which is assumed. The inductive method involves collection of facts, drawing conclusions from them and testing the conclusions by other facts. Deduction: i. Starts from the general and moves to the particular. ii. Begins with general assumptions and moves to particular conclusions. iii. Develops a theory, and then examines the facts to see if they follow the theory. Induction: University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 i. Starts from the particular and moves to the general. ii. Begins with particular observations and moves to general explanations. iii. Collects observations, then develops a theory to fit the facts. Purpose of using scientific methods Economists use scientific observation and deduction in their investigations. To achieve this they: Describe and measure the exchanges they observe Explain how interactions arise and create costs and benefits Propose hypotheses, construct, and apply ‘models’ to test these hypotheses. Gather data to put into the model Predict behaviour based on these models. Economists assume that economic events and phenomena do not occur at random, but are determined by underlying and understandable causes. Unlike the pure scientist, economists cannot undertake controlled experiments, so they must test their models in different ways. Statistical analysis of actual economic data can provide a flow of information from which to build models and test hypotheses. For example, by gathering data about changes in house prices it is possible to deduce factors that cause house prices to go up or down, and by how much. Models are a simplification of reality; the basic purpose of models is to explain or predict. The models can be expressed in words, graphs and equations , for example: C=0.90Y and S=0.10Y where C is consumption spending, Y is income, and S is saving The first equation inform us that the households spend or consume 90 per cent of their income and save 10 percent of their income. University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 Positive and normative economics As a social science, economics attempts to use the principles and methods of science to explain economic behaviour. This involves making positive statements about the economic world. Positive statements are those that can be verified, and are factual, such as: ‘.. House prices have fallen by 15% over the last year…’ In contrast, normative statements are based on opinion and value judgement. Statements suggesting that something ‘ought to’ happen, or that something is ‘unfair’, are normative because they are matters of opinion. For example, ‘..the recent fall in house prices is unfair to the rich..’. This statement cannot be tested because it not based on anything testable. If there is an agreed definition of fairness, and it can be measured, then it might be possible to test the effect of the change in house prices on the degree of fairness experienced by a certain identifiable group of people defined as rich. Therefore, this statement is normative, impossible to verify, and based on opinion rather than fact. The ceteris paribus rule Economics is a social science, and, unlike the physical sciences, cannot engage in controlled experimentation to demonstrate how variables are connected. In the real world, economic variables such as price and income, are constantly changing, and this creates a problem in demonstrating the relationship between variables. For example, a fall in price is likely to lead to a rise in consumer demand if we assume nothing else changes. University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 Of course, for independent reasons, income could also fall while demand does not rise. The fall in price could have been counteracted by a fall in income. The ceteris paribus rule, that all other things remain the same, is used whenever attempting to demonstrate the link between economic variables. Without this assumption, positive economics is impossible. Key concepts Model normative economics Microeconomics positive economics Macroeconomics ceteris paribus Assumption induction , deduction Self review Fill-in-the-Gap Questions: 1. Macroeconomics focuses on the performance of the _______ economy, while microeconomics studies the behavior of _______ and firms. 2. Positive economics deals with _______ statements that can be tested or verified, while normative economics involves _______ statements that include opinions or value judgments. 3. One of the primary objects of economics is to study how _______ resources are allocated to meet _______ human wants. 4. Microeconomics looks at issues like supply, demand, and price determination, while macroeconomics addresses topics such as _______, _______, and economic growth. 5. In economics, the scientific method is used to develop theories and test them through real-world data, using models to make _______ about economic behavior. Multiple Choice Questions: 1. Which of the following is the primary focus of macroeconomics? a) The behavior of individual markets and firms b) The entire economy, including national income and growth c) Consumer decision-making in small markets d) Pricing strategies of businesses Which of the following best describes microeconomics? University algiers3 Faculty of economics commercial sciences and management Introduction to economics semester 1 ; section 20. Pr Benachour ratiba 2024-2025 a) The study of the whole economy and national issues b) The study of individual markets and the behavior of consumers and firms c) The study of global economic trends d) The analysis of government spending and taxation Positive economics is primarily concerned with: a) Describing what ought to be b) Factual analysis and testable theories c) Value judgments about economic policies d) Ethical implications of economic decisions Normative economics involves: a) Objective analysis of economic data b) Factual and testable statements c) Opinion-based statements about what the economy should be like d) Calculating inflation and GDP growth rates Which of the following is an example of a positive economic statement? a) "The government should lower taxes to increase consumer spending." b) "An increase in demand leads to higher prices, all else being equal." c) "The minimum wage should be raised to improve living standards." d) "Unemployment should be reduced to 5% by next year." True/False Questions: 1. Economics primarily studies how individuals and societies allocate limited resources to meet their needs and wants. 2. Empirical methods in economics rely on data and real-world evidence to test hypotheses. 3. Qualitative methods in economics involve numerical data analysis and statistical techniques. 4. The scientific method is not applicable in economics because it deals with human behavior. 5. In economics, theoretical models are used solely to predict future market behaviors without any empirical testing.