History of economic thought Short characteristic of economics Petr Wawrosz

What term „economics“ mean

Term „economy“ or „economics“ Word „economy“ comes from Greek word „oikonomos“ Oikonomos = one who manages a household. What does have the household and economics common?

Household faces decision Which members of the household do which task and what each member gets in return. Examples (economic question that a household faces): - Who cooks dinner? - Who does the laundry? - Who gets the extra dessert at dinner? - Who gets to choose what TV show to watch? Household must allocate its scare resources among its various member, taking into account each member´s abilities, efforts and desires.

Society faces decision too Society must decide what jobs will be done and who will do them. Economic question the society faces: - What goods will be produced? - How the goods will be produced? - Who will receive the produced goods? Economic as the science gives answer how the different society solves above mentioned problems and what solutions are better.

Scarcity Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like. Scarcity does not mean poverty! Scarcity – objective concept. Poverty subjective concept. Scarcity leads to competitive behavior! Scarcity is „beyond“ basic economic questions!

Trade-off First, resources used to pursue one goal cannot be used to pursue another. Second, actions that move us toward one goal can move us away from another. Third, pursuing a goal may be good for some, but bad for others.

Economic system Different ways how the main economic question are solved. Traditional Command Pure market Mixed

Economics system Traditional: based on tradition, custom and habits both in production and division of produced goods and services. Usually no private property. Common property.

Economics system Command economy or centrally planned economy: what how and for whom to produce is decided by some authority.

Command economy Government also helps answer the three questions of allocation. Government allocation is INVOLUNTARY. It sets the laws and rules. A pure command economy is an economy that uses nothing but government to allocate resources. A pure command economy is another useful theoretical benchmark.

Command economy Government responses to the allocation questions: What? When government spends taxes, it dictates what goods will be produced. How? Government has laws and rules that specify how resources will be used to produce goods. For Whom? Government collects taxes from some people and distributes them among other people.

Economics system Pure market economy: Decision of any economic subject depends on their will, skills and possibilities. Government does not intervene in economy (does not offer some goods and so on), only provides legal structure.

Pure market economy Market responses to the allocation questions: What? Resources are used to produce goods with the highest prices. How? Goods are produced using the combination of resource with the lowest prices. For Whom? People with more income buy more goods.

Economics system Mixed economy: combined significant elements of market and command system (and may be of traditional system). Government offers some goods, intervenes on some markets and so on.

Mixed economy Real world economies form a continuum bounded by these two extremes. They are mixed economies: A mixed economy is one that relies on both markets and government to allocate resources. Market-oriented economies, also called capitalism, are mixed economies that lean heavily to the market end. Socialism and communism are mixed economies that lean more (a lot more) toward government control.

Mixed economy The mixed U.S. economy leans heavily to the market end of the market-government continuum. Three indicators of government involvement: Taxes: Government controls about 1/3 of the revenue generated in the economy each year. Spending: Government buys 20% of the goods produced each year. Regulations: Government influences many allocation decisions through laws, rules, and other restrictions.

Possible definitions of economics

Definition of economics Economics is the science which studies human behavior as the relationship between ends and scare means which have alternative uses. (Lionel Robbins, 1932). Economics is a part of social science and studies how people behave to satisfy their needs. (Hubbard and O´Brien, 2010).

Definition of economics Economics is a study of how people organize the use of resources to satisfy their wants. (J. Sickle 1954). Economics is study how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study how people make choices and how their choices affect their environment. (R. Miller 2012).

Definition of economics In short, economist seeks to understand how well the market economy works and to identify where government may need to intervene to correct specific aspect of market failure. (Lipsey and Chrystal, 2007) Which economic system is the best one? Market system: self-organization, efficient organization, based not on benevolence but on self- interest. Self-interest produces a outcome convenient for other people (A. Smith „invisible hand“). Market failure. Advantages and disadvantages of other systems.

Definition of economics Economics has been called “The Dismal Science.” But it's also been called “the science of how people get a living.” Our daily lives are beset with economic questions! (Henry George, about 2000) Economics is a study of mankind in the ordinary business life. (Alfred Marshall, 1890).

Microeconomics and macroeconomics

Microeconomics Microeconomics is the study of how households and firms make choices, how they interact in markets and how government attempts to influence their choices. - e.g. how consumers and producers respond to changes in prices, income and other facts or incentives. Try to find the most efficient way (e.g. in reducing smoking, drug policy, global warming)

Macroeconomics Macroeconomics is a the study of economics as a whole, including topics such as inflation, unemployment and economic growth. It tries for instance to explain: - why economies experience period of recessions and booms, - why in long run some economies have grown much faster than others, - whether the government intervention can improve economic condition.

Individual and collective choice Economics is about individual choice. People often group to form collective organizations. Economics analyzes how collective organizations make a choice. Macroeconomic aggregates (GDP, inflation, …) depend on in many individual choices.

Positive and normative economics

Positive versus normative economics Positive economics: what is among economic relationships. The statements are only about actual or alleged facts. Normative economics: what ought to (should) be, what is good or bad. The value judgments are necessary to assess the truth of statement. See:

Positive statementsNormative statements Higher interest rates cause people to save more. People should save more. High income tax rate discourage effort. Governement should tax the rich to help the poor. High taxes on cigarettes discourage smoking. Smoking should be discouraged. Roaduse charge would increase traffic. The tax system should be used to reduce traffic. People are more worried about inflation than unemployment. Technical chance is a bad thing because it puts some people out of work. The burning of fossil fuels is causing global warming. Government should do more to reduce carbon emissions in order to save the planet from global warming.

Why do economists often disagree Different benchmark Differences between short and long consequences. It is not clear by what factors a output was caused. The importance of the specific factor. Different values. Economics is one of the youngest sciences known to man.

Microeconomics goals Efficiency: This is getting the highest amount of satisfaction from available resources. Efficiency is achieved when society cannot change the distribution of resources in any way that would increase the total amount of satisfaction obtained by society. Equity: This is the fairness with which income or wealth is distributed within a society. Equity occurs when income or wealth is fairly distributed. But the standards of fairness differ and puts us into normative economics.

Macroeconomics goals Full employment: This is when all available resources (labor, capital, land, and entrepreneurship) are used to produce goods and services. It enables more production that can reduce the scarcity problem. Stability: This is avoiding or limiting fluctuations in production, employment, and prices. It reduces uncertainty of the future. Growth: This is increasing the economy's ability to produce goods and services. It improves living standards and better addresses the scarcity problem.

The consequences of disagreement of economists Economics is the only field in which two people can get a Nobel Prize for saying exactly the opposite thing.