The Scope And Method Of
Economics
•People wants are unlimited. Resources are
limited.
•Wants exceed quantity available for any
economic good.
•Economics
•The study of how individuals and societies choose to use the scarce resources that
nature and previous generations have provided.
Why Study Economics?

To Learn A Way Of Thinking
three fundamental concepts:
– Opportunity cost
– Marginalism, and
– Efficient markets
Opportunity cost
 The best alternative that we forgo, or give up, when
we make a choice or a decision.
Opportunity cost is not the value of all the
alternatives forgone. It is the value of the
second best alternative only.
If you could earn 1 million baht per month
while not attending the class, you may not
choose to enroll the University since your
opportunity cost is too high for you.
Marginalism
•The process of analyzing the additional or
incremental costs or benefits arising from a
choice or decision. Marginal means a small
change.
•sunk costs Costs that cannot be avoided,
regardless of what is done in the future,
because they have already been incurred.
Efficient market
A market in which profit opportunities are
eliminated almost instantaneously.
The study of economics teaches us a way of
thinking and helps us make decisions.
The Scope of Economics
Microeconomics 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 The branch of economics
that examines the economic behavior of
aggregates—income, employment, output,
and so on—on a national scale.
TABLE 1.1 Examples of Microeconomic and
Macroeconomic Concerns
The Method of Economics
Positive economics
An approach to economics that seeks to
understand behavior and the operation of
systems without making judgments. It
describes what exists and how it works.
Examples: Which factors determines a fall
in housing prices? What will happen if we
experience a higher inflation rate?
Normative economics
An approach to economics that analyzes
outcomes of economic behavior, evaluates
them as good or bad, and may prescribe
courses of action. Also called policy
economics.
Positive Economics is often
divided into Descriptive
Economics and Economic
Theory.
Descriptive economics
-The compilation of data that describe
phenomena and facts.
Examples: Large volumes of data can be
found on the WWW (world bank, ADB, IMF
websites). You can also find your country
data of GDP, unemployment, inflation rates,
and so on. These data describe many
features of our economies.
Economic theory
-A statement or set of related statements
about cause and effect, action and
reaction.
Example: Law of Demand: When the price
of a product rises, people tend to buy less
of it; when the price of a product falls,
people tend to buy more.
The Method of Economics
Model
A formal statement of a theory,
usually a mathematical statement of a
presumed relationship between two
or more variables.
Variable
A measure that can change from time
to time or from observation to
observation.
We can set a model with variables using an
statement as follow; remember our in-class
example that
“quantity demanded for coffee depends on
price of coffee and students’ income level”
In an equation form:
Qty DD = -Price of coffee + Income level of
students
Ockham’s razor
The principle that irrelevant detail should
be cut away.
Economic models are abstraction that strip
away detail to expose only those aspects of
behavior that are important to the
question being asked.
Models
All Else Equal: Ceteris Paribus
ceteris
paribus, or all else equal A device used to
analyze the relationship between two
variables while the values of other variables
are held unchanged.
Qty DD = -Price of coffee + Income level of
students
Economists have looked at four different
criteria for judging economic outcomes:
1. Efficiency
2. Equity
3. Growth
4. Stability
Efficiency
Efficiency In economics, allocative
efficiency. An efficient economy is one that
produces what people want at the least
possible cost.
Equity
Equity Fairness. This is impossible to define
universally. Fairness is often in the eye of
the beholder.
Growth Stability
Stability A condition in which national
output is growing steadily, with low
inflation and full employment of resources.
SLOPE
∆Y
∆X
=
Y2 −Y 1
X2 −X1
A positive slope indicates that increases in X are
associated with increases in Y and that decreases in
X are associated with decreases in Y.
A negative slope indicates the opposite—when X
increases, Y decreases and when X decreases, Y
increases