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Lecture -1 Subject and methods of Economic Theory

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Lecture outline. 1.The subject of Economic Theory. Three basic problems of daily living 2. Methods of Economic Theory

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3. Positive and normative Economics 4.Microeconomics and Macroeconomics

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Economics is the study of how society decides what, how, and for whom to produce.

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Economy - is a special sphere of social life with its own laws, problems and contradictions. In this area, the economic potential of a society is formed, producing different goods for satisfaction the physiological and spiritual needs of people. Economics - efficient management of limited productive resources for the purpose of attaining the maximum satisfaction of human material needs. Economics is concerned with the efficient use of scarce resources for the production of goods and services to satisfy material needs. Economics - how to use scarce resources efficiently

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Economic theory is a science which studies production relations between economic agents in the process of production, exchange, distribution and consumption of goods and services

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Thinking Like an Economist Every field of study has its own terminology Mathematics integrals  axioms  vector spaces Psychology ego  id  cognitive dissonance Law promissory  estoppel  torts  venues Economics supply  opportunity cost  elasticity  consumer surplus  demand  comparative advantage  deadweight loss

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Thinking Like an Economist Economics trains you to. . . . Think in terms of alternatives. Evaluate the cost of individual and social choices. Examine and understand how certain events and issues are related.

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The subject of Economics is human behaviour in the production, distribution, exchange and use of goods and services.

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Three basic problems of Economics What goods and services to produce How to produce these goods and services For whom to produce these goods and services

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Positive economics The aim of positive economics is to explain how society makes decisions about consumption, production, and exchange of goods

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Normative economics It offers recommendations based on value judgements.

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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

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Microeconomics - is concerned with the specific economic units and detailed consideration of the behavior of those individuals (we examine the trees, not the forest) Macroeconomics - is concerned with the economy as a whole or with the basic subdivisions or aggregates (government, household, business sectors), (total output, total income, total level of employment)