The Nature of Economics and Methodology of Research PDF

# The Nature of Economics and Methodology of Research ## Learning Objectives * Define Economics * Explain the five big questions that economists seek to answer * Explain eight ideas that define the economic way of thinking * Describe how economists go about their work ## Economics: definition Ec...

# The Nature of Economics and Methodology of Research ## Learning Objectives * Define Economics * Explain the five big questions that economists seek to answer * Explain eight ideas that define the economic way of thinking * Describe how economists go about their work ## Economics: definition Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οίκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". ## A Definition of Economics Continue... * **Scarcity of resources:** Society's wants exceed the resources available to satisfy them. * **Economics** is the science of choice - the science that explains the choices that we make and how those choices change as we cope with scarcity. ## Economics: definition continue... Alfred Marshall. Principles of Economics (1890): "... a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. ## Political Economy vs. Economics * **Political economy** originally term for studying production, buying, and selling, and their relations to law, custom, and government, as well as to the distribution of national income and wealth, including through the budget process. ## Political Economy vs. Economics ### Classical Political Economy * **Sir William Petty:** A Treatise of Taxes and Contributions (1662) - he is attributed as having started the philosophy of 'laissez-faire' in relation to government activity. * **Adam Smith:** An Inquiry into the Nature and Causes of the Wealth of Nations. (1776) - "invisible hand", division of labor, absolute advantage in foreign trade. * **David Ricardo:** Principles of Political Economy and Taxation (1817) - comparative advantage in foreign trade, labor theory of value * **Karl Marx:** The Capital (Volumes I-IV, 1867-1894) ## Learning Objectives * Define Economics * Explain the five big questions that economists seek to answer * Explain eight ideas that define the economic way of thinking * Describe how economists go about their work ## Five Big Economic Questions * What? * How? * When? * Where? * Who? ### What? What goods and services are produced and in what quantities? Do we produce houses or cars, food or entertainment, gasoline or plastics, private goods or public goods, weapons or medical services, etc.? ### How? How are goods and services produced? Do we use labor or machines to produce the goods we want? Manual with simple instruments or even automated versus robotized technologies? ### When? When are goods and services produced? Do we increase or decrease production? Ahead of the change in demand or following the demand changes? ### Where? Where are goods and services produced? Do we produce the goods in Bulgaria, Germany, the U.S. or in China? Next to the raw materials or thousand of kilometers away: for instance, extracting bauxite in Australia and producing aluminum in Germany, drilling crude oil in Russia or Iraq but refining the oil in Burgas, Bulgaria? ### Who? Who consumes the goods and services that are produced? Do we sell our goods to the wealthy, or the poor? Does it matter or the only important thing is the volume of income? Is there any difference in answering this question from the producers, consumers, and the society as a whole? ## Learning Objectives * Define Economics * Explain the five big questions that economists seek to answer * Explain eight ideas that define the economic way of thinking * Describe how economists go about their work ## Big Ideas of Economics The questions give you a sense of what economics is about. The Big Ideas of Economics describe how economists think about these questions and seek answers to them. ### Big Ideas of Economics **IDEA 1** A choice is a *tradeoff* - we give up something to get something else - and the highest valued alternative we give up is the *opportunity cost* of the activity chosen. **IDEA 2** We make choices in small steps, or at the *margin*, and choices are influenced by *incentives*. * *Marginal Benefit vs. Marginal Cost* * *Incentives* are inducements to take particular actions **IDEA 3** *Voluntary exchange* makes *both buyers and sellers better off*, and *markets* are an *efficient way* to *organize exchange*. * Buyers receive goods or services * Sellers receive money or other goods (barter trade). **IDEA 3 (cont.)** Markets are *efficient* because they ensure that *resources* will be used where they are valued most highly. **IDEA 4** The *market* does not always work *efficiently*, and sometimes, *government action* is necessary to *overcome market failure* and lead to a more *efficient use of resources*. *Market failure* is a state in which the *market* does not use *resources* efficiently. **IDEA 5** For the *economy* as a whole, *expenditure* equals *income* equals the *value* of *production*. **IDEA 6** *Living standards* improve when *production* per *person* increases (*labor productivity*). This increase in *output* per *person* will enable more people to own *goods* and *services*. **IDEA 7** *Inflation* occurs when the *quantity of money* increases faster than *production*. *Inflation* results from "too much *money* chasing too few *goods*." **IDEA 8** *Unemployment* can result from *market failure* but some *unemployment* (*natural unemployment*) is *productive*. * Unemployment rates vary. * Some *unemployment* results from *employees* searching for a *suitable job* and *employers* searching for *suitable workers*. This *unemployment* improves *productivity*. ## Microeconomics, Macroeconomics and International Economics * **Microeconomics** is the study of individual people (*households*) and *businesses* and the *interaction* of those *decisions* in *markets*. *Studies:* * Prices and Quantities * Effects of government *regulation* and *taxes* ## What Economists Do * **Macroeconomics** is the study of the *national economy* and the *global economy* as a whole. * Studies: * Average *prices* and *total employment*, *income*, and *production* -Gross Domestic Product (GDP) * Effects of *taxes*, *government spending*, a *budget deficits* on *total jobs* and *incomes* * Effects of *money* and *interest rates* ## What Economists Do ### International Economics (World Economy): * *foreign trade*, *competitiveness* on the *world market place*, *international capital flow* and *international capital markets*, *foreign exchange mechanisms*, *economic integration* (EU, NAFTA), *interaction* with the *IMF*, *World bank* and other *international financial institutions* ## Economic Science *Economists* attempt to *discover* an *explanation* for how *economic systems* work. *Economists* distinguish between *Positive Statements* and *Normative Statements* ## Economic Science * **Positive statements** are about *what is*. *Can be *proven* right or wrong. *Can be *tested* by comparing it to *facts*, like: * *inflation* leads to *lower purchasing power*, *recession* increases *unemployment*, *foreign investments* stimulate the *economic development* and *lower the unemployment*, etc.. * **Normative statements** are about *what ought to be*. *Depend upon *personal values* and cannot be *tested*. ## Economic Science **Objective** *Discover* and *catalog* *positive statements* that are *consistent* with *what we observe* in the *world* and that *enable us* to *understand* how the *economic world works*.