The Nature and Method of Economics

Lecture 1Dominika Milczarek-

Andrzejewska

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Introduction• Office hours: Thursday 16.45-17.45,

room 401• E-mail: milczarek@wne.uw.edu.pl• http://www.ekonpol.wne.uw.edu.pl

• Required Textbook: C.R. McConnell and S.L. Brue, Economics

• Written exam: multiple choice and open questions

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Course outline:1. Nature and Method of Economics2. Economics as Social Science 3. Principles of Economic Methodology4. Economic Systems5. The Economizing Problem6. Consumer Behaviour7. The Costs of Production

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Course outline:8. Market Equilibrium9. Market Failure and Externalities. Economic

Role of Government10.Macroeconomics - Basic Concepts11.Economic Growth and Economic

Development12.Employment and Unemployment. Human

and Social Capital 13. International Economics and World

Economy

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Outline of Lecture 1• The Economic Perspective

– Scarcity and Choice– Rational Behaviour– Benefits and Costs

• Why Study Economics?

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Definition of EconomicsEconomics is the social science

concerned with the efficient use of scarce resources to achieve the

maximum satisfaction of economic wants.

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Definition of EconomicsEconomics allows to answer very

important questions:– What to produce?– How to produce?– For whom?

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Definition of EconomicsOrigins of the term:• Directly from Old French word

economie meaning “management of a household”

• Adopted from Latin word oeconomia and Greek word oikonomia (Oikos meaning house and –nomos meaning managing)

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• SCARCITY & CHOICE• We „can’t have it all” – decision what we will have and what we must forgo• “There is no free lunch”• alternative use of resources: land, capital, labor• opportunity costs – to get more of one thing you forgo opportunity of getting something else

The Economics Perspective

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• RATIONAL BEHAVIORPursuing opportunities to increase

utility

UTILITY “Pleasure, happiness, satisfaction”

Individuals weigh costs and benefits – their decisions are „rational” (not „random”)

The Economics Perspective

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• RATIONAL BEHAVIOR• Different choices under different circumstances• Different choices made by different people (different preferences)

self-interest ≠ selfishness• helping family• contributing to charities

The Economics Perspective

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The Economics PerspectiveMARGINAL ANALYSISMarginal Benefits & Marginal CostsChoices involve changes in the status quo“Marginal” means “extra”, “additional” or “a change in”For example:

• Should you study an extra hour for an exam?• Should government increase or decrease funding for education?

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Most of the ideologies of the modern world have been shaped by prominent economists of the past:• Adam Smith• David Ricardo• John Stuart Mill• Karl Marx• John Maynard Keynes• plus many modern contributors...

For example, the president of United States benefits from the recommendations of his Council of Economic Advisors

Why Study Economics

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Why Study Economics

Economics for CitizenshipMost of today’s political problems have important economic aspects.

For example:• What level of taxes should we have?• How can we reduce poverty?

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Why Study Economics

Professional & Personal ApplicationsImprovement of analytical tools necessary for business and personal needs.

For example: • Is it more economical to buy or lease a car?• Last but not least: studying economics as an investment

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Lecture 2Economic Methodology • Economics and Other Sciences, • Theoretical Economics and Policy

Economics, • Macroeconomics and Microeconomics• Positive and Normative Economics