Copyright © 2004 South-Western/Thomson Learning Lecture 1: Introduction Outline I. What is economics? the main questions economics attempts to answer economic agents of society and their economic decisions the market: product, capital, labor II. Microeconomics vs. Macroeconomics differences in subject matter the circular flow diagram III. Methods of economics: theory, model, data IV. Diversities and disagreements among economists two causes of disagreement normative vs. scientific economics different schools of thought in economics different economic systems

Copyright © 2004 South-Western/Thomson Learning What is Economics? Economics is a social science that aims at the study of production, distribution, consumption and accumulation of wealth in society.

Copyright © 2004 South-Western/Thomson Learning What is Economics? Production: What is produced? How much? Using what method of production / technology? Distribution: Who takes what share of total production? How is total wealth distributed amongst the different social groups (such as class, race, nation, ethnic group, region, gender, etc.) Consumption: How do individuals take their consumption vs. savings decisions? Who consumes how much of what type of good or service? Accumulation: How fast does wealth accumulate (i.e.growth)? What factors lead to fast growth? What factors hemper it? Why do economic crises occur? How does growth translate into improved standards of living for the people?

Copyright © 2004 South-Western/Thomson Learning Economic Agents of society and their economic decisions Households / Individuals as consumers and suppliers of labor a household (HH): group of individuals living under the same roof and hence sharing a common budget Firms as producers; employers of labor; and investors, users of technology and capital The Government as decision-maker on legal framework and policies (fiscal, monetary, industrial and social welfare policies, macro programs, development plans, etc.)

Copyright © 2004 South-Western/Thomson Learning Figure 1 The Circular Flow

Copyright © 2004 South-Western/Thomson Learning Microeconomics and Macroeconomics Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets HHs → consumption/savings decisions; labor supply decisions Firms → production decisions: what and how much to produce, technology choice, employent of factors of production, investment decisions.

Copyright © 2004 South-Western/Thomson Learning Macroeconomics Macroeconomics looks at the economy as a whole. Economy-wide aggregate phenomena such as National income Growth Inflation Unemployment Economic fluctuations (expansions and recessions) Savings and Investment Productivity Financial Markets: Money Supply, Interest Rates Open Economy Macro: International Trade, Capital Flows, Exchange Rates, Balance of Payments

Copyright © 2004 South-Western/Thomson Learning Macroeconomics Macroeconomics answers questions like the following: Why is average income high in some countries and low in others? Why do prices rise rapidly in some time periods while they are more stable in others? Why do production and employment expand in some years and contract in others?

Copyright © 2004 South-Western/Thomson Learning The two-way relationship between Microeconomics and Macroeconomics Microeconomic decisions of individual agents when they come together in the aggregate make up the macroeconomics phenomena. IN TURN; Macroeconomic phenomena affect the indivdual consumption and labor supply decisions; and the firm production decisions.

Copyright © 2004 South-Western/Thomson Learning Slide #10 Introduction Introduction--The Issues and Approach of Macroeconomics Three time-frames of macroanalysis Short-run Medium-run Long-run

Copyright © 2004 South-Western/Thomson Learning The Methods of Economics as a Science: Observation, Theory, Data Analysis, and More Observation Theories, Models, Data Observes real world events to develop theories about how a complex, real world operates; Builds models to explain specific economic relationships; Makes simplifying assumptions in building the models; Collects and analyzes data to evaluate the models and the theories.

Copyright © 2004 South-Western/Thomson Learning POSITIVE VERSUS NORMATIVE ANALYSIS Positive statements are statements that attempt to describe the world as it is. Called descriptive analysis Normative statements are statements about how the world should be. Called prescriptive analysis

Copyright © 2004 South-Western/Thomson Learning Positive or Normative Statements? An increase in the minimum wage will cause a decrease in employment among the least-skilled. Higher government budget deficits will cause interest rates to increase. ? ? POSITIVE VERSUS NORMATIVE ANALYSIS ?

Copyright © 2004 South-Western/Thomson Learning Positive or Normative Statements? The income gains from a higher minimum wage are worth more than any slight reductions in employment. The government should be allowed to collect from tobacco companies the costs of treating smoking- related illnesses among the poor. ? ? POSITIVE VERSUS NORMATIVE ANALYSIS ?

Copyright © 2004 South-Western/Thomson Learning WHY ECONOMISTS DISAGREE Scientific reasons: They may disagree about the validity of alternative positive theories about how the world works. Value judgements: They may have different values and, therefore, different normative views about what policy should try to accomplish.

Copyright © 2004 South-Western/Thomson Learning Different Schools of Thought in Economics The mainstream school of thought: Neoclassical Economics Non-mainstream schools of thought: Keynesian Economics Marxian Economics Institutionalist Economics Structuralist Economics Feminist Economics....and so on.

Copyright © 2004 South-Western/Thomson Learning Economic Systems (from B. Üstünel, Ekonominin Temelleri; Section 4; Economic Systems ) Philosophical FoundationsInstitutional Framework Capitalism Liberalism Individualism Utility-disutility motivation Private property and contracts Market mechanism and price signals Socialism Desire to control its own destiny Collectivism Service-welfare motivation Collective ownership of means of production Central planning Mixed Economy Desire to live freely Individual-society relations Desire for social security Limited private property and contracts Democratic planning and social welfare state