Economics – It is the social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants.
THE ECONOMIC PERSPECTIVE (economic way of thinking)
ü Scarcity and Choice – Scarcity limits our options and necessitates that we make choices. But we “can’t have it all”, we must decide what we will have, and what we must forgo.
ü Rational Behavior (Rational Self-interest) – Individuals look for and pursue opportunities to increase their utility --- that is pleasure, happiness, or satisfaction.
ü Marginalism – comparisons of marginal benefits and marginal costs.
WHY STUDY ECONOMICS?
ü Economics for Citizenship – As voters, we can influence the decisions of our elected officials in responding to such questions. But intelligence at the polls requires a basic working knowledge of economics. And a sound grasp of economics is even more helpful to the politicians themselves.
ü Professional and Personal Applications – Economics lays great stress on precise, systematic analysis. Thus, studying economics invariably helps students to improve their analytical skills. Economics is also vital to business. An understanding of the basics of economic decision making and the operation of the economic system enables business managers and executives to increase their profit. Economics helps consumers and workers make better buying and employment decisions.
ECONOMIC METHODOLOGY
Economics relies on scientific method. It consists of a number of elements:
ü Observation of facts
ü Formulation of possible cause and effect (hypothesis)
ü Testing of explanation by comparing the outcomes of specific events to the outcome predicted by the hypothesis.
ü The acceptance, rejection, or modification of the hypothesis based on these comparisons.
ü The continued testing of the hypothesis against the facts. A very well tested and widely accepted theory is referred to as a law or principle. Models are simplified representations of how something works, such as a market or segment of the economy.
v Theoretical Economics – involves establishing economic theories by gathering, systematically arranging, and generalizing from facts.
v Other-Things – Equal – Assumption (Ceteris Paribus) – They consume that all other variables are held constant for a particular analysis.
v Abstractions – are simplifications that omit irrelevant facts and circumstances.
v Policy Economics – recognizes that theories and data can be used to formulate policies – courses of action based on economic principles and intended to resolve a specific economic problem or further an economic goal.
Basic Steps in Policymaking:
· State the goal
· Determine the policy options
· Implement and evaluate the policy that was selected.
v Economic Goals
· Economic Growth – Produce more and better goods and services, or more simply, develop a higher standard of living.
· Full employment – Provide suitable jobs for all citizens who are willing and able to work.
· Economic efficiency – Achieve the maximum fulfillment of wants using the available productive resources.
· Price – level Stability – Avoid inflation or deflation.
· Economic freedom – Guarantee that businesses, workers and consumers have a high degree of freedom in their economic activities.
· Equitable distribution of income – Ensure that no group of citizens faces poverty while most others enjoy abundance.
· Economic security – Provide for those who are chronically ill, disabled, laid off, aged or otherwise unable to earn minimal levels of income.
· Balance of trade – Seek a reasonable overall balance with the rest of the world in international trade and financial transactions.
Macroeconomics – examines the economy as a whole.
Microeconomics – focuses on specific units of the economy.
Positive economics – deals with factual statements (“what is”).
Normative economics – involves value judgments (“what ought to be”).
PITFALLS TO SOUND REASONING
ü Biases
ü Unfamiliar or confusing terminology
ü Fallacy of composition
ü Difficulty of establishing clear cause-effect relationships
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