Monday, January 13, 2014

Economics


If all the economists were laid end to end, they’d never reach a conclusion.

George Bernard Shaw
There are only two problems in my life. The political ones are insoluble and the economic ones are incomprehensible.
Alexander Douglas Home

What is economics?
  • Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.
  • Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.
Economics is…
  • The science of wealth. – Adam Smith (Father of Economics)
  • The study of men in the ordinary business of life. – Alfred Marshall
  • The study of how society uses its scarce resources. – Economics A-Z (Economist.com)
  • A study of supply and demand.
  • The term economics was coined around 1870 and popularized by Alfred Marshall, as a substitute for the earlier term political economy which had been used through the 18-19th centuries, with Adam Smith, David Ricardo, and Karl Marx as its main thinkers and which today is frequently referred to as the “classical” economic theory. Both economy and economics are derived from the Greek oikos- for “house” or “settlement”, and nomos for “laws” or “norms”.
Definitions
 
Economics
Two main branches
  • Microeconomics is the branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, business firms and households.
  • Macroeconomics is the branch of economics that examines the economic behaviour of aggregates—income, output, employment and so on—on a national scale.
Microeconomics
  • Microeconomics is the study of individual choice, and how that choice is influenced by economic forces.
  • Microeconomics studies such things as:
    • The pricing policy of firms
    • Households’ decisions on what to buy
    • How markets allocate resources among alternative ends
Macroeconomics
  • Macroeconomics is the study of the economy as a whole.
  • It considers the problems of inflation, unemployment, business cycles, and economic growth.
  • Studies the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices
  • Can be used to analyze how best to influence policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments
Two main branches
  • Microeconomics
    • concerned with the small economic unit e.g. the household, a commodity, or an industry
    • dedicated to study of resource allocation (“making ends meet’)
  • Macroeconomics
    • economic relationships on the large scale
      (John Maynard Keynes. The General Theory of Employment, Interest, and Money. 1936)
  • Microeconomics
    • impact of a plant closing on buying behaviour of employees’ households
  • Macroeconomics
    • effect of plant closings on the unemployment rate of a province or country
Examples of Micro/Macro concerns
Production Prices Income Employment
Microeconomics Production output in individual industries and businesses
How much steel
How many offices
How many cars
Price of individual Goods and Services
Price of medical care
Price of gasoline
Food prices
Apartment rents 
Distribution of Income and Wealth
Wages in the auto industry
Minimum wages
Executive salary
Poverty 
Employment by Individual Businesses & Industries
Jobs in the steel industry
Number of employees in a firm
Macroeconomics National Production Output
Total Industrial Output
Gross Domestic Product
Growth Output
Aggregate Price Level
Consumer prices
Producer prices
Rate of Inflation
National Income
Total wages and salaries
Total corporate profits
Employment and Unemployment in the Economy
Total number of jobs
Unemployment rate 

Classical economics
  • Dates from publication of Adam Smith’s Inquiry into the Nature and Causes of the Wealth of the Nations in 1776
    • conflict versus growth; can’t count on everything in times of crisis and revolutions
  • Smith established the school of “political economy” [early name for economics]
  • Classical economics attempted to derive laws that would explain and predict production, distribution and consumption
    • things were changing, needed to record
  • Other noted political economists: David Ricardo, John Stuart Mill, Jean Baptiste Say, Thomas Malthus
    • Malthus noted that there were too many people in the world
Neoclassical
  • Focused on supply and demand and saw economic activity as the outcome of choice
  • Microeconomic orientation
  • Neoclassical theory holds that individuals, households, and companies rationally serve their best interests and that competition sorts out prices, wages, and the markets for goods and labor as the economy moved toward equilibrium.
  • Noted figure: Alfred Marshall.
Keysian economics
  • Based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s
  • Keynes believed market forces will not guarantee full employment so government intervention is needed
  • Macroeconomic is in focus
To understand my state of mind, however, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionize—not, I suppose, at once but in the course of the next ten years—the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions I can’t predict what the upshot will be in its effects on action and affairs. But there will be a great change…
 
-John Maynard Keynes
Economics
  • A mathematically based discipline
    • consists of charts and graphics
  • Econometrics (application of statistics to economics) fastest growing field
  • Era of the global economy
    • NAFTA, WTO, EEC
  • Economists advise business, insurance companies, banks, securities firms, industry and trade associations, labor unions, and government agencies. They frequently prepare detailed, quantitative reports about business and economical and financial states.
Sources for economic data
The most important include:
  • National government agencies
  • Trade associations
  • Stock and commodity exchanges
  • Banks, other financial institutions
  • Newspapers, business periodicals
  • Credit institutions
  • Insurance companies
  • Mutual fund managers
  • Stock brokers
Problems and trends
  • decline in the number of undergraduate students majoring in economics
Enrolement 92/93 11,299 Enrolement 96/97 8,437 -25.3
Degrees granted 92/93  4,446 Degrees granted 96/97  3,179 -28.5 

  • Much research done outside universities
  • Difficult to understand – jargon
  • Requires competency in mathematics
  • Intertwining with politics
  • Neglected in typical K-12 curriculum
  • Increasing specialization
Economics
Information users
  • University/college teachers
    • Heavy reliance on textbooks
    • Current issues + economic history & thought
    • Methodology at undergrad level; how do you teach?
  • K-12 teachers
    • Clear popular treatments of basic issues
    • Topical issues, e.g. home financing planning
  • Adults
    • Investment information, RRSPs, RESPs, state of the economy and predictions about future that are clear and easy to understand
  • Children/teens
    • Material to support school curriculum
    • Saving for university
    • Economic aspects of marriage and family

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