History of economic thoughtShort characteristic of economics

Petr Wawrosz

Term „economy“ or „economics“

• Word „economy“ comes from Greek word „oikonomos“

• Oikonomos = one who manages a household.• What does have the household and economics

common?

Household faces decision

• Which members of the household do which task and what each member gets in return.

• Examples (economic question that a household faces):- Who cooks dinner?- Who does the laundry?- Who gets the extra dessert at dinner?- Who gets to choose what TV show to watch?

• Household must allocate its scare resources among its various member, taking into account each member´s abilities, efforts and desires.

Society faces decision too

• Society must decide what jobs will be done and who will do them.

• Economic question the society faces:What goods will be produced?How the goods will be produced?Who will receive the produced goods?

• Economic as the science gives answer how the different society solves above mentioned problems and what solutions are better.

Scarcity

• Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.

• Scarcity does not mean poverty!Scarcity – objective concept. Poverty subjective concept.

• Scarcity leads to competitive behavior!

• Scarcity is „beyond“ basic economic questions!

Economic system

• Different ways how the main economic question are solved.

• Traditional• Command• Pure market • Mixed

Economics system

• Traditional: based on tradition, custom and habits both in production and division of produced goods and services.

• Usually no private property. Common property.

Economics system

• Command economy or centrally planned economy:what how and for whom to produce is decided by some authority.

Economics system

• Pure market economy:• Decision of any economic subject depends on

their will, skills and possibilities.• Government does not intervene in economy

(does not offer some goods and so on), only provides legal structure.

Economics system

• Mixed economy:combined significant elements of market and command system (and may be of traditional system).

• Government offers some goods, intervenes on some markets and so on.

Definition of economics

• Economics is the science which studies human behavior as the relationship between ends and scare means which have alternative uses. (Lionel Robbins, 1932).

• Economics is a part of social science and studies how people behave to satisfy their needs. (Hubbard and O´Brien, 2010).

Definition of economics

• Economics is a study of how people organize the use of resources to satisfy their wants. (J. Sickle 1954).

• Economics is study how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study how people make choices and how their choices affect their environment. (R. Miller 2012).

Definition of economics

• In short, economist seeks to understand how well the market economy works and to identify where government may need to intervene to correct specific aspect of market failure. (Lipsey and Chrystal, 2007)

• Which economic system is the best one?• Market system: self-organization, efficient organization, based

not on benevolence but on self-interest. Self-interest produces a outcome convenient for other people (A. Smith „invisible hand“).

• Market failure.• Advantages and disadvantages of other systems.

Definition of economics

• Economics has been called “The Dismal Science.” But it's also been called “the science of how people get a living.” Our daily lives are beset with economic questions! (Henry George, about 2000)

• Economics is a study of mankind in the ordinary business life. (Alfred Marshall, 1890).

Microeconomics

• Microeconomics is the study of how households and firms make choices, how they interact in markets and how government attempts to influence their choices. - e.g. how consumers and producers respond to changes in prices, income and other facts or incentives.

• Try to find the most efficient way (e.g. in reducing smoking, drug policy, global warming)

Macroeconomics

• Macroeconomics is a the study of economics as a whole, including topics such as inflation, unemployment and economic growth.

• It tries for instance to explain:- why economies experience period of recessions and booms,- why in long run some economies have grown much faster than others,- whether the government intervention can improve economic condition.

Individual and collective choice

• Economics is about individual choice.• People often group to form collective

organizations.• Individual choices still underlie and direct the

decision made within organization.

• Macroeconomic aggregates (GDP, inflation, …) depend on in many individual choices.

Topics of economics

• Consumer and his/her behavior• Producer and its behavior• Equilibrium on specific market• Characteristic of markets – perfect and imperfect

competition• Market of factors of production• Capital market (market of lending funds)• Microeconomic general equilibrium theory• Public sector economics, market failures• Government intervention, economic efficiency

Topics of economics

• GDP • Economic growth• Money• Inflation• Unemployment• Aggregate expense

(demand)• Aggregate supply

• Macroeconomic equilibrium

• Business cycle • International

economics, exchange rate

• Fiscal policy• Monetary policy

Some important economic terms

• Entrepreneur• Innovations• Technology• Firm, company, business• Goods• Services• Revenue (total, average,

marginal)• Cost (total, average,

marginal, fixed, variable, explicit, implicit, opportunity, sunk)

• Profit (economic, accounting

• Household• Factors of production• Physical capital• Human capital• Social capital

Positive versus normative economics

• Positive economics: what is among economic relationships.The statements are only about actual or alleged facts.

• Normative economics: what ought to (should) be, what is good or bad. The value judgments are necessary to assess the truth of statement.

• See: http://www.youtube.com/watch?v=aZEP1ii1UmI

Positive statements Normative statements

Higher interest rates cause people to save more.

People should save more.

High income tax rate discourage effort.

Governement should tax the rich to help the poor.

High taxes on cigarettes discourage smoking.

Smoking should be discouraged.

Roaduse charge would increase traffic.

The tax system should be used to reduce traffic.

People are more worried about inflation than unemployment.

Technical chance is a bad thing because it puts some people out of work.

The burning of fossil fuels is causing global warming.

Government should do more to reduce carbon emissions in order to save the planet from global warming.

Why do economists often disagree

• Different benchmark• Differences between short and long

consequences.• It is not clear by what factors a output was

caused. The importance of the specific factor.• Different values. • Economics is one of the youngest sciences

known to man.