Prof. Dr. Rumen Gechev

1. Prof. Dr. Rumen Gechev The Nature of Economics and Methodology of Research

2. Learning Objectives • Define Economics • Explain the five big questions that economists seek to answer • Explain eight ideas that define the economic way of thinking • Describe how economists go about their work

3. Economics: definition Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greekοἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)"

4. A Definition of Economics Continue… • Scarcity of resources: Society’s wants exceed the resources available to satisfy them. • Economicsis the science of choice — the science that explains the choices that we make and how those choices change as we cope with scarcity.

5. Economics: definition continue… Alfred Marshall. Principles of Economics (1890): “…a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.

6. Political Economy vs. Economics • Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process.

7. Political Economy vs. Economics Classical Political Economy Sir William Petty: A Treatise of Taxes and Contributions(1662) - he is attributed as having started the philosophy of 'laissez-faire' in relation to government activity. Adam Smith: An Inquiry into the Nature and Causes of the Wealth of Nations. (1776) – “invisible hand”, division of labor, absolute advantage in foreign trade. David Ricardo - Principles of Political Economy and Taxation (1817) – comparative advantage in foreign trade, labor theory of value Karl Marx: The Capital (Volumes I-IV, 1867-1894)

8. Learning Objectives • Define Economics • Explain the five big questions that economists seek to answer • Explain eight ideas that define the economic way of thinking • Describe how economists go about their work

9. Five Big Economic Questions What? How? When? Where? Who?

10. What? Whatgoods and services are produced and in what quantities? Do we produce houses or cars, food or entertainment, gasoline or plastics, private goods or public goods, weapons or medical services, etc.?

11. How? How are goods and services produced? Do we use labor or machines to produce the goods we want? Manual with simple instruments versus automated or even robotized technologies?

12. When? When are goods and services produced? Do we increase or decrease production? Ahead of the change in demand or following the demand changes?

13. Where? Where are goods and services produced? Do we produce the goods in Bulgaria, the U.S. or in China? Next to the raw materials or thousand of kilometers away: for instance, extracting bauxite in Australia and producing aluminum in Germany, drilling crude oil in Saudi Arabia but refining the oil in the USA or in the UK.

14. Who? Who consumes the goods and services that are produced? Do we sell our goods to the wealthy, or the poor? Does it matter or the only important thing is the volume of income? Is there any difference in answering this question from the producers, consumers, and the society as a whole?

15. Learning Objectives • Define Economics • Explain the five big questions that economists seek to answer • Explain eight ideas that define the economic way of thinking • Describe how economists go about their work

16. Big Ideas of Economics The questions give you a sense of what economics is about. The Big Ideas of Economics describe how economists think about these questions and seek answers to them.

17. Big Ideas of Economics IDEA 1 A choice is a tradeoff — we give up something to get something else — and the highest valued alternative we give up is the opportunity cost of the activity chosen.

18. Big Ideas of Economics IDEA 2 We make choices in small steps, or at the margin, and choices are influenced by incentives. • Marginal Benefit vs. Marginal Cost • Incentives are inducements to take particular actions

19. Big Ideas of Economics IDEA 3 Voluntary exchange makes both buyers and sellers better off, and markets are an efficient way to organize exchange. • Buyers receive goods or services • Sellers receive money.

20. Big Ideas of Economics IDEA 3 (cont.) Markets are efficient because they ensure that resources will be used where they are valued most highly. Alternative to Market Economy Command Economy

21. Big Ideas of Economics IDEA 4 The market does not always work efficiently and sometimes, government action is necessary to overcome market failure and lead to a more efficient use of resources. Market failure is a state in which the market does not use resources efficiently.

22. Big Ideas of Economics IDEA 5 For the economy as a whole, expenditure equals income equals the value of production.

23. Big Ideas of Economics IDEA 6 Living standards improve when production per person increases (labor productivity). This increase in output per person will enable more people to own goods and services.

24. Big Ideas of Economics IDEA 7 Inflation occurs when the quantity of money increases faster than production. Inflation results from “too much money chasing too few goods.”

25. Big Ideas of Economics IDEA 8 Unemployment can result from market failure but some unemployment (natural unemployment) is productive. • Unemployment rates vary. • Some unemployment results from employees searching for a suitable job and employers searching for suitable workers. This unemployment improves productivity.

26. Learning Objectives • Define Economics • Explain the five big questions that economists seek to answer • Explain eight ideas that define the economic way of thinking • Describe how economists go about their work

27. What Economists Do Microeconomics, Macroeconomics and International Economics Microeconomics is the study of individual people (households) and businesses and the interaction of those decisions in markets. Studies: • Prices and Quantities • Effects of government regulation and taxes

28. What Economists Do Macroeconomicsis the study of the national economy and the global economy as a whole. Studies: • Average prices and total employment, income, and production • Effects of taxes, government spending, a budget deficits on total jobs and incomes • Effects of money and interest rates

29. What Economists Do International Economics: foreign trade, competitiveness on the world market place, international capital flow and international capital markets, foreign exchange mechanisms, economic integration (EU, NAFTA), interaction with the IMF, World bank and other international financial institutions

30. Economic Science Economists attempt to discover an explanation for how economic systems work. Economists distinguish between Positive Statements and Normative Statements

31. Economic Science Positive statements are about what is. • Can be proven right or wrong. • Can be tested by comparing it to facts – inflation leads to lower purchasing power, recession increases unemployment, foreign investments stimulate the economic development and lower the unemployment, etc.. Normative statements are about what ought to be. • Depend upon personal values and cannot be tested.

32. Economic Science Objective Discover and catalog positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works.

33. Economic Science Steps • Observation and Measurement • Model Building • Testing

34. Obstacles and Pitfalls in Economics Unscrambling Cause and Effect Ceteris Paribus Fallacy of Composition The statement that what is true of the parts is true of the whole or what is true of the whole is true of the parts.

35. Obstacles and Pitfalls in Economics Post Hoc Fallacy The error or reasoning that a first event causes a second event because the first occurred before the second.