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Summary introduction to economics and business economics
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Summary introduction to economics and business economics
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lOMoARcPSD|11911780Introduction to economics and business economics
Theme 1: Samuelson 1980 (1915-2009)
Economics is the study of how people interact with each other and with their
surroundings in providing their livelihoods, and how it changes over time.
Economics is just 2 centuries old and was introduced when the Declaration of Independence
was signed. This caused political freedom and was closely related to emancipation of
free-market pricing without state regulation. Samuelson thinks it hard to compress the
definition of economics in a few lines. A general definition:
“Economics Is the study of how people and society end up choosing, with or without the use
of money, to employ scarce productive resources that could have alternative uses: to
produce various commodities and distribute them for consumption, now or in the future,
among various people and groups in society. Economics analyses the cosis and the
benefits of improving patterns or resources used.”
NEW (Net Economic Welfare) shows the welfare side that is not included in the GNP. It
adjusts the conventional measure of GNP to allow for leisure, pollution costs, disamenities of
urban life etc.
Political economy shows people how, if they really want to, they can trade off quantity of
goods for quality of life.
Samualson states that every national issue mentioned requires economic understanding to
make progress in dealing with it. Just a single semester of economics will change your view
on the world. Economics is a subject that combines both humanities and sciences. It borders
on sociology, political science, psychology, anthropology and history. The study of statistics
is of special importance. Mathematics itself is only needed for the higher reaches of
economic theory.
The first task of modern political economy is to describe; to analyze and explain; to correlate
the behaviour of production, unemployment, prices and similar phenomena.
In the important problem of economic policy you need to have an objective and detached
ability to see things as they are, regardless of our likes or dislikes since economic problems
are close to everybody emotionally. (Is an objective economy even possible since scientists
themselves are human?)
Not all economists agree with each other and basic questions concerning right and wrong
cannot be settled by mere science.
An economist is interested in the workings of the economy as a whole rather than in the
viewpoint of any one group.
It is usually not possible to make economic observations the same way scientific laboratories
do. This way, our quantitative economic knowledge is far from complete. An analysis should
simplify and abstract out of the large amount of information.
Fallacy of composition: a fallacy in which what is true of a part is, on that account alone,
alleged to be also necessarily true of the whole.
, lOMoARcPSD|11911780
Economics is both a science and an art: it is studied to understand problems facing the
citizen and family, to help governments in underdeveloped and advanced nations promote
growth and improve the quality of life while avoiding depression and inflation, analyze
fascinating patterns of social behaviour, to understand and alter the inequalities in the
distribution of income and opportunity.
Samuelson calls economics the Queen of social sciences because:
1. Economics is the only science which simultaneously studies human
behaviour (social) and relies on quantitative methods of physical sciences.
2. Its abstractness and its mathematical/analytical approach make economics a
very particular social science
3. Other social sciences have abandoned the positive approach a long time ago
4. Economics is more famous for its method that its ideology
Fundamental economic problem = individuals have unlimited need but earths resources
are scarce.
Normative/prescriptive economics= Making assumptions about what is right or wrong,
what should be done or not done, what is desirable or undesirable etc. It involves judgement
and cannot be tested or verified
- For example: we should tax the rich more than the poor.
Positive economics= descriptive. Can be right or wrong and can be tested or verified.
- unemployment is rising.
Deductive= Making logical conclusions from general prepositions. Starts with a general
theoretical proposition that is assumed to be true and ends in testing the conclusions
empirically.
Inductive= Making general conclusions about a big subject. Begins with a particular set of
observations and develops a theory which is consistent with the facts.
Real world perspective =
1. a strong awareness of the complex socio-economic reality: human behaviour is not
always rational and markets are not always in equilibrium. Institutions are
important for understanding economic dynamics and so are dimensions of time
and space.
2. Leads to a multidisciplinary economics approach.
Theme 2: What is the subject of economics?
“Economics is the science which studies human behaviour as a relationship between ends
and scarce means which have alternative uses” = too limited because:
- It is individualistic
- rational behaviour
- materialistic
- static
so we use the definition: “ The study of how people interact with each other and with their
natural surroundings in providing their livelihoods, and how this changes overtime”.
, lOMoARcPSD|11911780
The economy is the imagination of:
- nation-state with political management
- International order: Aggregates
Growth and fluctuations are shown in graphs (Business cycle) = start of economics
After severe economic hardships (e.g. wars) there were crises and people started to connect
this together and study it.
Le Tableau Économique Ragnar Frisch 1933 by François Quesnay (1694-1764)is the first
imagination of an economy.
What is missing is government - that gives you an idea how to interact with the economy
Interaction comes from Keynes:
Y=C+I+(X-M) = national income
Y=C+I+G+(X-M) = national output
(Keynes)
Keynes realized that what is needed to interfere in government spending
GDP= total value of everything produced in a given period (=average annual income)
- Aggregate demand
- aggregate output
- aggregate income
- aggregate spending
What happens in a household itself is not covered in GDP
GDP became an important indicator of how an economy is doing
—> countries started to compete in economic performance
But GDP says nothing about the welfare of a country
GDP is not the same as the disposable income = the amount of wages or salaries, profit,
rent, interest and transfer payment from the government (e.g. unemployment or disability
benefits) or from others (e.g. gifts) received over a given period, minus transfers the
individual made to others (e.g. tax). It is the maximum amount of food, housing, clothing etc.
that the person can buy without going into debt.
It leaves out:
- quality of our social and physical environment
- Amount of free time
- Goods and services we do not buy
- Goods and services that are produced within the household
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