1. Subject, matter and methodology of economics

Economy (economic studies) – humanitarian science which studies how individuals and societies choose how to use scares resources provided by the nature and previous generations

Scope of Economics: it can be Labor, Financial, Urban/rural, Environmental, etc. but 2 major divisions:

• Micro – studies the behavior of individuals, firms and Government (market agents) in the situation of situation of scares resources, it also studies how market agents make their choices. Sees and examines the ‘trees’

• Macro – studies national economy as a whole. Sees and analyses the ‘forest’

Method of Economics – Economics uses different instruments and approaches:

1. Positive approach – studies what is now (makes statements)

2. Normative approach – says what should be (judgments, opinions, recommendations)

Economics may be:

• Descriptive – describes the situation and deals with raw facts (statistics)

• Theoretical – generalizes and formulates a theory (sort of generalization, conclusion); provides models in various forms (mathematical, verbal, verbal-mathematical)

Methods Economics uses:

1. Economic Models – are abstract, ignore lots of unnecessary details and concentrate only on the basic trends and characteristics

2. Abstraction – a method of research used in Economics, when we use it we say “other things being equal”

3. Basic Assumption of Economics – “other things being the same/ all else equal”

4. Analysis and Synthesis:

• Analysis – a mental splitting of an economic phenomenon into components for further research of those components separately

• Synthesis – is used after the analysis to combine all the partial knowledge and get a full knowledge

5. Inductive/Deductive (Formal logic) methods:

• Induction – theory and generalizations are based on raw facts (particular=>general)

• Deduction – starts with a hypothesis and then the theory is tested against the facts (general=>particular)

6. Dialectical logic (Marx method) – considers every Economic phenomenon as a system all the elements of which have the same origin and are dependent, the system is constantly developing

Mercantilism- source of wealth is in trade (seel more, buy less; export more than import), to achieve trade balance+accumulate money): Thomas Mun, Antonio Serra.

Classical polit ec- only producing a nation could be wealthy): Physiocracy (France)-critisise gov regulaton, taxes. Eng classical polit economy-point out the role of prod-n as a major source of wealth, supported the principle of laissez-faire. Accent o industry, not agriculture. (William Petty, Adam Smith, David Recardo).

Marxism (K.Marx)-political economy of labour, ideas: ability to create a natural product, the ability to create product value; surplus value is created by the hired workers, while it is appropriated by capital owners)

Neo-classical- focus on the efficiency of the market economy. On indiv. Problem: how to get max utility for consumers and max profit for prod-rs at min costs. Alfred Marshal farther of microec, introduced the word economics.

Keynesian- focus on macroec, market is not self-regulated, gov-t should interfere.

Institutionalism- family, trade unions, monopoly, finance are considered as institutions.

Cautions and Pitfalls of Strait Thinking:

1. Fallacy of Composition – what’s good for a part is not necessarily good for the whole

2. “After this => Because of this” fallacy (ex. Meteorolofist)

3. Correlation vs causation (pay attention to what is what) (schools and criminals in big cities)

4. Bias, prejudgment

5. Loaded terminology

6. Definitions (should know)

Basic Economic Concepts:

1. Wants – unlimited and endless human desires, Maslow divided them into 5 types (physiological, safety, love-belonging, self-esteem, self-actualization)

Necessity goods – satisfy our basic wants

2. Economic Resources – are provided by nature/previous generations, are differently classified by different theories:

1. Marxist:

• Human Resources – people with their skills and knowledge applied in work

• Non-Human Resources – means of production, include objects and means of labor (inc land)

2. Non-Marxist:

• Natural resources (land)

• Human resources (labour)

• Manufactured resources (capital)

• Enterpreneural ability – ability to combine resources and use them efficiently at own risk

3. Labour – all the physical talents of people that may be used in production; all forms of human input (skills+knowledge)

4. Capital – special economic relations; resources with which you can produce smth directly (not money!)

5. Scarcity – the access of human wants over what can actually be produced to fulfill these wants

6. Opportunity Cost – the cost of any activity in terms of the best alternative forgone, grows with each additional unit consumed/produced

7. Marginal benefits – additional benefit from consumption/production of one more unit of a good

8. Marginal cost – additional cost of consumption/production of one more unit of a good

9. Production Possibility Curve (PPC) – shows all the combinations of 2 goods that can be produced in a given time moment provided that all the resources and technology are used to completely and efficiently

d & bed prod

ucts. ( Y↑ > X↑ in order to compensate the negative effect). MRS = positive.ood products. MRS=infinity.