NATURE AND METHODS OF ECONOMICS AUSAF AHMAD Presentation on November 21 st 2007 At Aligarh College of Engineering and Management Aligarh U.P.

Dominance of Economic Issues Dominance of economic issues in social discussions. Dominance of economic issues in social discussions. Economics has become the intellectual religion of the day. Economics has become the intellectual religion of the day. Lack of economic literacy Lack of economic literacy Economic education Economic education

CLASSIFICATION OF KNOWLEDGE KNOWLEDGE Divine Knowlege Human Knowledge Arts Sciences Natural Sciences Social Sciences

NATURAL SCIENCES MATHEMATICS ASTRONOMY PHYSICS Chemistry Biology

SOCIAL SCIENCES SOCIAL SCIENCES ECONOMICS SOCILOGY POLITICS ANTHROPOLYGY HISTORY PSYCHOLOGY

DIFFERENT APPROACHES TO ECONOMICS Classical approach: Smith, Ricardo, J.B. Say Classical approach: Smith, Ricardo, J.B. Say –Economics is the Science of Wealth. Critique of Classical Approach: Marx and Carlyle Critique of Classical Approach: Marx and Carlyle Dismal Science and Bread and Butter Science Dismal Science and Bread and Butter Science Neo Classical Approach: Neo Classical Approach: Economics studies human welfare Economics studies human welfare Modern Approach: Modern Approach: Economics studies how unlimited wants could be fulfilled with limited resources. It is a science of choice. Economics studies how unlimited wants could be fulfilled with limited resources. It is a science of choice.

Economic goods and Free goods Distinction between economic goods and Free goods. Distinction between economic goods and Free goods. Scarcity as a fact of economic life Scarcity as a fact of economic life There is nothing like a Free lunch. There is nothing like a Free lunch.

Economy and Economic organization Meaning of Economy Meaning of Economy An economy is a organization of human beings through which they carry out certain basic economic activities such as production, exchange, distribution and consumption to fulfil their needs. An economy is a organization of human beings through which they carry out certain basic economic activities such as production, exchange, distribution and consumption to fulfil their needs. Basic Functions of an Economy Basic Functions of an Economy

BASIC FUNCTIONS OF AN ECONOMY WHAT TO PRODUCE? [issue of Allocation of Resources ] WHAT TO PRODUCE? [issue of Allocation of Resources ] HOW TO PRODUCE [ issue of choice of techniques ] HOW TO PRODUCE [ issue of choice of techniques ] FOR WHOM TO PRODUCE [ issue of Distribution of the produce FOR WHOM TO PRODUCE [ issue of Distribution of the produce

PRODUCTION POSSIBILITY CURVE Substitution between Guns and Butter Guns in thousands Butter in thousand kg Y1Y1 Y2Y2 Y3Y3 YCYC XCXC x1x1 x2x2 x3x3

DIFFERENT VIEWS OF ECONOMY CONSUMPTION UNITS CONSUMPTION UNITS households Economy Individuals

DIFFERENT VIEWS OF ECONOMY PRODUCTION UNITS PRODUCTION UNITS Economy Sectors f industries Sectors Firms

DIFFERENT VIEWS OF ECONOMY EXCHANGE UNITS EXCHANGE UNITS Economy Markets

METHODS OF ECONOMIC INQUIRY Theoretical Methods Theoretical Methods Empirical Methods Empirical Methods Both Methods are used in Economics Both Methods are used in Economics No method is superior or inferior to other. No method is superior or inferior to other. Each method has its own limitation. Each method has its own limitation. To judge an economic data (result, principle or theory) one must consider how it has been arrived at. To judge an economic data (result, principle or theory) one must consider how it has been arrived at.

THEORETICAL AND EMPIRICAL METHODS Real World Conclusions about the Real World. Experimental Design Experiment Result of Experiment Logical Model Logical Reasoning Logical Conclusion Theoretical Abstraction Experimental Abstraction Statistical Interpretation Theoretical Interpretatio n

Deductive and Inductive logic Deductive logic. Deductive logic. –Major and Minor Premises –Conclusion is correct if major premise is correct. For example: All human beings are mortal. All human beings are mortal. John is a human being. John is a human being. John is mortal. John is mortal. Necessarily True

Deductive and Inductive logic Incorrect Premises lead to incorrect conclusions: Incorrect Premises lead to incorrect conclusions: All Men are Stupid John is a man John is a man John is stupid. John is stupid. Not necessarily true

Deductive and Inductive logic Inductive Logic: Inductive Logic: John is stupid Tom is stupid Tom is stupid Jack is stupid John, Tom and jack are humans Therefore, all humans are stupid. Not Necessarily True Based on the Law of Uniformity of Nature, which is itself unproved. Based on the Law of Uniformity of Nature, which is itself unproved.

MICRO AND MACRO ECONOMICS Micro economics is the study of functioning of one unit of the economy i.e. an individual, a household, a market etc. Micro economics is the study of functioning of one unit of the economy i.e. an individual, a household, a market etc. Macro economics is the study of functioning of full economy, different units interacting with each other. Macro economics is the study of functioning of full economy, different units interacting with each other. It is not correct to say that one is more important or more correct than the other. It is not correct to say that one is more important or more correct than the other.

SOME CRITIQUE OF MODERN ECONOMICS Modern Economics is not value neutral as claimed by positivist. Modern Economics is not value neutral as claimed by positivist. One may not accept value premises of modern economics. For example, family is unit of analysis in developing countries while individual is center of analysis in modern economics One may not accept value premises of modern economics. For example, family is unit of analysis in developing countries while individual is center of analysis in modern economics Modern economics assumes and treats man as homo- economicus, motivated only by self interest. Modern economics assumes and treats man as homo- economicus, motivated only by self interest. The economy is perceived to be driven only by Profit motive. There may be other motives of economic behavior. The economy is perceived to be driven only by Profit motive. There may be other motives of economic behavior. Modern economy gives more weight to efficiency in comparison to equity and justice. Modern economy gives more weight to efficiency in comparison to equity and justice.

EPILOGUE THANK YOU FOR FOR YOUR TIME AND CONSIDERATION. YOUR TIME AND CONSIDERATION.