Durgesh C Pathak

T Th S 5 : F 106; Tutorial: Th 1: F 106;

Outline:
o What is Economics & why to Study it?
o The scope of Economics
o The Methods of Economics
o How to read graphs!

The Scope and Method of Economics

Durgesh C Pathak

What is Economics & why to Study it?

Economics

The study of how individuals and

societies choose to use the scarce
resources that nature and
previous generations have
provided

Since individuals choose => Study of how choice making

Societal
Choice
(Individual
Choices)= Societal
Choice
The Scope and Method of Economics
Durgesh C Pathak

To learn a way of thinking

To be an informed voter

Why Should
I study
Economics?

To understand Society

To understand global affairs

The Scope and Method of Economics

Durgesh C Pathak

To learn a way of thinking:

Arises because resources are scarce

Opportunity Cost: the alternative foregone

3
Concepts

Marginalism: the process of analysing the

additional/incremental cost/benefit arising
from a choice

Sunk Costs

Efficient Markets: A market in which profit

opportunities
are
eliminated
almost
instantaneously

The Scope and Method of Economics

Durgesh C Pathak

To understand the society

Physical Environment of the society

Economic decisions
shape the society

Character of the society

The Scope and Method of Economics

Durgesh C Pathak

To understand global affairs

World after 9/11

How Economics
affect world
affairs?
Occupy Wall street
Sept 17, 2011; Zuccotti Park

The Scope and Method of Economics

Durgesh C Pathak

To be an informed voter

India shining!

I should know
what the
government
is doing!

Walmart

The Scope and Method of Economics

Durgesh C Pathak

The Scope of Economics

Microeconomics

Deals with the functioning of individual industries and the

behaviour of individual economic decision-making units

Business firms, Households

Economics

Macroeconomics

Deals with the functioning of the economy as a whole

The Scope and Method of Economics

Durgesh C Pathak

The Diverse Fields of Economics

TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns

DIVISION OF
ECONOMICS
Microeconomics

Macroeconomics

PRODUCTION

PRICES

INCOME

EMPLOYMENT

Production/output in
individual industries
and businesses

Price of individual
goods and services

Distribution of
income and
wealth

Employment by
individual businesses
and industries

How much steel

How much office
space
How many cars

Price of medical care

Price of gasoline
Food prices
Apartment rents

Wages in the auto industry

Minimum wage
Executive salaries
Poverty

Jobs in the steel

industry
Number of employees
in a firm
Number of accountants

National
production/output

Aggregate price level

National income

Employment and
unemployment in
the economy

Total industrial output

Gross domestic
product
Growth of output

Consumer prices
Producer prices
Rate of inflation

Total wages and

salaries
Total corporate
profits

Total number of jobs

Unemployment rate

The Scope and Method of Economics

Durgesh C Pathak

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The Methods of Economics

Analyses the behaviour and functioning of the economics system without

indulging in value-judgments
Positive
Economics
Studies What is
Methods of
Economics
Analyses the outcomes of the economic bahaviour and asks whether they
are good or bad and whether they can be improved.

Normative
Economics

Studies What
should be

Positive Theories

Economic Policies

Empirical Facts

Normative Goals

The Scope and Method of Economics

Durgesh C Pathak

Source: Ralph Byrns

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Descriptive
Economics

Compilation of data that describes phenomena

and facts. E.g. poverty profile of India

Positive Economics

Economic Theory

A statement or a set of statements about cause

and effect, action and reaction. E.g. law of
1
demand ( )

The Scope and Method of Economics

Durgesh C Pathak

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Theory
&
Model

A coherent group of tested general propositions, commonly regarded as correct, that

can be used as principles of explanation and prediction for a class of phenomena.
A theory employs abstraction to analyse a phenomenon.

A formal statement of a theory. Usually a mathematical statement of a presumed

relationship between two or more variables. For instance, house prices are a function
of the floor area, number of rooms, etc. = , .

Variable

A measure that can vary from time to time or from observation to observation. E.g., Age, Intelligence

Ockhams Razor: The principle that irrelevant details

should be cut away

The Scope and Method of Economics

Durgesh C Pathak

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The Scope and Method of Economics

Durgesh C Pathak

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Ceteris Paribus: All Else Equal

A device used to analyse the relationship between two variables while the values of other variables are held constant.

Using the device of Ceteris Paribus is a part of the process of Abstraction. Used to simplify the reality to focus on the
relationships that interest us.
Example: The demand for good X depends on Price of good X, Price of good Y, Income of the consumer, and his tastes and
preferences.
= ( , , , , )

If we are now interested only in studying the relationship between the price of the good X and the demand for it, we may
keep the other things affecting the relationship as constant.
= , , , ,

The Scope and Method of Economics

Durgesh C Pathak

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Expressing Models in Words, Graphs, and Equations

People generally buy less of a good when

its price rises.

Price

P2
P1

X2 X1
Quantity Demanded

The Scope and Method of Economics

Durgesh C Pathak

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Cautions and Pitfalls!

The Post Hoc Fallacy:

Post hoc, ergo propter hoc: After this, therefore
because of this
A common error made in thinking about
causation
The Fallacy of Composition:
True for part, so must be true for the whole
also.

The Scope and Method of Economics

Durgesh C Pathak

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Testing Theories and Models: Empirical Economics

Empirical
Economics

The collection and use of data to test

economic theories

The Scope and Method of Economics

Durgesh C Pathak

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Economic Policy

Efficiency

Allocative Efficiency: An efficient economy is one that

produces what people want at the least possible cost.

Equity

Fairness. Example: trickle down approach

Growth

An increase in the total output of the economy

Criteria for judging

economic performance

Stability

The condition in which national

output is growing steadily, with low
inflation and full employment of
resourc

The Scope and Method of Economics

Durgesh C Pathak

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