History of economic thought Short characteristic of economics Petr Wawrosz

What 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!

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.

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.

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.

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.

Some topics of economics

Topics of economics Consumer and his/her behavior Producer and its behavior Equilibrium on specific market Characteristic of markets – perfect and imperfect competition Market of factors of production Capital market (market of lending/loanable funds) Microeconomic general equilibrium theory Public sector economics, market failures Government intervention, economic efficiency

Topics of economics GDP Economic growth Money Inflation Unemployment Aggregate expense (demand) Aggregate supply Macroeconomic equilibrium Business cycle International economics, exchange rate Fiscal policy Monetary policy

Some important economic terms

Revenue (total, average, marginal) Utility Scarcity Entrepreneur Firm, company, business Goods Services Technology Innovations Factors of production (labor, capital, land and natural resources) Physical capital Human capital Social capital Cost (total, average, marginal, fixed, variable, explicit, implicit, opportunity, sunk) Profit (economic, accounting) Household Production Possibility Frontier Efficiency Productive efficiency Allocative Efficiency Absolute advantages Comparative advantages

Some important economic terms Market Product market Factor market Loanable market Demand Price Quantity demanded Income effect Substitution effect Movement along demand Shift of demand Elasticity Elastic, inelastic, unit elasticity Price elasticity of demand Income elasticity of demand Cross price elasticity of demand

Some important economic terms Supply Price Quantity supplied Movement along demand Shift of demand Elasticity Inelastic supply

Some important economic terms Market equilibrium Surplus in the market Shortage in the market Minimum price (price floor) Minimum wage (price ceilings) Maximum price Menu cost Consumer surplus Producer surplus Deadweight loss Black market

Some important economic terms Rivalry Excludability Private goods (rivalrous and excludable) Public goods Quasi-public goods Common resources Tragedy of Commons

Some important economic terms Externalities Positive externalities Negative extenalities Private and social benefit Private and social cost Transaction cost Coase theorem

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.

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.

Some economists and other people connected with issues mentioned in presentation

Antic philosophers Xenophon 430 – 354 Plato 428/427 or 424/423 BCE – 348/347 BCE Aristotle 384–322 BCE Used term „„oikonomos“ Wrote about managing household

Adam Smith 1723 – 1790 An Inquiry into the Nature and Causes of the Wealth of Nations (1776) Founder of economics as a science Formed main economic problems and questions Scarcity Utility Divison of labour

Invisible hand As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Invisible hand It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. See: u4wE

David Ricardo 1772 – 1823 Theory of comparative advantage Supporter of free international trade Fighter again Corn Laws

Alfred Marshall 1842 – 1924 Founder of modern microeconomics Supply, Demand, Marshall´s scissors Utility, scarcity Marginal utility, marginal cost Market Equilibrium … 1890: Principles of Economics

John Maynard Keynes 1883 – 1946 Founder of modern macroeconomics Aggregate demand Theory of money Unemployment The General Theory of Employment, Interest and Money (1936)

Simon Kuznets 1901 – 1985 Founder of methods how to calculate GDP National accounting

Arthur Cecil Pigou 1877 – 1959 Externalities, public goods Consumer surplus, producer surplus Welfare economics

Ronald Coase (1910 – 2013) Externalities Public goods (light house) Transaction costs The nature of firm