The nature and method of economics:
* Economics is concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wants.
The study of economics is important because;
* Constitutes the basis of much government economic policy or shapes the design and impact of this policy. * Informs those involved with the design of economic policy and the analysis of its impact. * Improves our understanding of the economic consequences of economic and social policy, and makes us better informed citizens who can make better decisions when electing public officials. * Provides basic economic information and allows the interpretation of this information in ways that help people make rational business decisions. * Encourages us to take a social perspective on economic problems and provides the techniques with which we can do this.
* Macroeconomics: is concerned with either the economy as a whole or with the basic subdivisions aggregates that that make up the economy. (Aggregate: a collection of specific economic units that are treated as if they were one unit) * Microeconomics: is concerned with specific economic units and a detailed consideration of the behaviour of these individual units.
The practise of economics usually combines three elements;
* Describing or gathering facts.
* Developing principles or theories that make generalisations about economic behaviour. * Applying the insights gained from economic statistics and analysis in the form of policy or strategy prescription.
Two approaches taken by economists to develop economic theories; * The deductive approach: beginning at the level of theory and proceeding to the verification or rejection of this theory by appealing to the facts. Economists may draw on a casual observation, to frame an untested principle called a hypothesis. * The inductive approach: begins with the accumulation of facts, which are then arranged systematically and analysed so as to permit, the creation of a principle.
* Positive economics: deals with the facts and avoids value judgement (what is). Attempts to set out scientific statements about economic behaviour. * Normative economics: Normative economics involves someone’s value or judgement about what the economy should be like or what particular policy action should be recommended (what ought to be).
Policy prescription requires;
* A movement from positive economics to normative economic, and the recognition of the importance and impact of value judgements on policy choices. * The statement of economic goals-
- Economic growth
- Full employment
- Economic efficiency
- Price-level stability
- Economic freedom
- An equitable distribution of income
- Economic security
- External balance
* Recognition of the possible effects of alternative economic policies, their costs and benefits, and the political feasibility of their implementation. * An intent and willingness to conduct an evaluation and consequences of the chosen economic policy.
* Fallacy of composition: to assume incorrectly that what is true for the individual or part is necessarily also true for the group or whole. e.g. A wage increase for John is desirable because, given product prices, it increases John’s purchasing power and standard of living. But if everyone receives a wage increase, product prices may rise and inflation may result. Thus, Johns standard if living may be unchanged or worse. * Post-hoc fallacy: to assume that, simply because one event proceeds another, the first caused the second.
Our ability to engage in valid economic reasoning faces a number of potential obstacles; * The biases and preconceptions we bring to the study of economics, which may lead to a desire to see specific results emerge from our analysis regardless of their validity. * A desire on the part...