Scope and Methods of Economics

Hand-out - 1
COM 11032
Learning Objectives
 define economics
 identify major divisions of Economics
 explain methods and field of Economics
 express the key terms in Economics
Economics is a social science which deals with human wants and their satisfaction. In other
way it can be defined as it is the study of the ALLOCATION of SCARCE resources to meet
UNLIMITED human wants.
Main Divisions of Economics
: Consumption deals with the satisfaction of human wants
: Production refers to the creation of wealth
: Goods are exchanged for money in modern economy.
: Wealth is produced by the combination of land, labour, capital
and organization
Major Divisions of Economics
 Microeconomics
 Macroeconomics
Microeconomics - is concerned with decision-making by individual economic agents such as
firms and consumers.
Macroeconomics - is concerned with the aggregate performance of the entire economic
system. That is, examines the economic behavior of aggregates- income, employment, output,
and so on – on a national scale
Methods of Economics
1. Positive economics
2. Normative economics
3. Descriptive economics
4. Empirical economics
Positive Economics
It is the study of the causal relationships that exist in the economy. It just states what the
relationship is and there are no value judgments involved.
 The statement “if taxes on tobacco is doubled, there will be substantial reduction in
tobacco consumption” is a positive economic statement.
“If government subsidy to basic education is reduced, there will be higher drop-outs
among children of poor families”, is another positive economic statement.
Normative Economics
Normative economics is a branch of economics that expresses value or normative judgments
about economic fairness. It focuses on what the outcome of the economy or goals of public
policy should be.
 “Taxes on tobacco should be raised by 100% to substantially reduce tobacco
consumption”. Notice the term should in the statement.
 In the education example, a normative economic statement would likely be, “The
government should continue to subsidize basic education to minimize drop outs”.
Descriptive Economics
Descriptive economics involves the collection of a country's economic data and compilation
by economists. The aim of the process is to try and identify repetitive patterns in the economy
and to try and explain them.
Empirical Economics
This is an approach to economics that involves the observation and measurement of behavior.
Empirical evidence is a source of knowledge acquired by means of observation or
Field of Economics
 Comparative Economic System
A comparative economic system is the subfield of economics dealing with the
comparative study of different systems of economic organization, such
as capitalism, socialism, feudalism and the mixed economy.
Urban and Regional Economics
Urban economics is broadly the economic study of urban areas; as such, it involves using the
tools of economics to analyze urban issues such as crime, education, public transit, housing,
and local government finance.
This is the application of statistical and mathematical theories to economics for the purpose
of testing hypotheses and forecasting future trends. Econometrics takes economic models and
tests them through statistical trials. The results are then compared and contrasted against reallife examples.
Development Economic
Development economics is a branch of economics which deals with economic aspects of the development
process in countries. It involves the creation of theories and methods that aid in the determination of
policies and practices and can be implemented at either the domestic or international level
Labour Economics
Labour economics seeks to understand the functioning and dynamics of the markets for wage
labour. Labour markets function through the interaction of workers and employers.
International Trade
International trade is the exchange of capital, goods, and services across international borders
or territories.
International Monetary Economics
Same as international finance, but with more emphasis on the role of money and less on other
financial assets.Study trade flows among countries and international financial institutions
Public Economics
It is focusing on studying the public secto rand examining the ways it interacts with
the private sector. A variety of topics are covered, including taxation, welfare, and the impact
of social policy on economic health.
Economic History
Economic history is the study of economies or economic phenomena in the past. Analysis in
economic history is undertaken using a combination of historical methods, statistical
methods, and by applying economic theory to historical situations and institutions.
Economic Theory
Economic theory is a set of related statements about the cause and effect of economic and
social phenomena.
For example, an economic theory would be "if the price of something goes up, people will
buy less of it." We could test that theory by observing whether or not cigarette sales decline
after a price increase.
A model is a more formal statement of a theory. It often takes the form of stating the
presumed relationship between two or more factors in a precise way.
The factors included in a model are called variables because they are things that can change
over time. A theory links these two variables together in such a way that explains the causal
relationship between them in a testable way
Occam’s Razor
It's often important to dispense with less relevant aspects of an issue so that we can focus on
specific issues. When economists try to explain social phenomena, they key in on the factors
that seem most relevant. This practice comes from the principle known as Occam's razor,
which instructs us to strip away extraneous detail in order to expose the important aspects of
a question.
A measure that can change from time to time or from observation to observation.Two
basic types are (1) Independent variable: that can take different values and can cause
corresponding changes in other variables, and (2) Dependent variable: that can take different
values only in response to an independent variable.
Ceteris paribus
Literally, “all else equal”. Used to analyze the relationship between two variables while the
values of other variables are held unchanged.
"If we reduce our prices by X percent, ceteris paribus, our sales revenue should go up by Y
Stocks and flows
Stocks and flows are basic concepts in economics. Stocks can be measured at a given point of
time. A flow is a quantity that can be measured only in terms of a specified period of time. In
other words, it has a time dimension. For example, wealth is a stock and income is a flow.
Econometric model
conometric models are statistical models used in econometrics. An econometric model
specifies the statistical relationship that is believed to hold between the various economic
quantities pertaining to a particular economic phenomenon under study.
C_t = a + bY_{t-1} + e_t,
where Ct is consumer spending in month t, Yt-1 is income during the previous month, and et
is an error term measuring the extent to which the model cannot fully explain consumption.
Then one objective of the econometrician is to obtain estimates of the parameters a and b;
these estimated parameter values, when used in the model's equation, enable predictions for
future values of consumption to be made contingent on the prior month's income.
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