Approximate scheme of knowledge assessment during the course

 

	The student’s activity on:	Number of points min / max
I	CURRENTCONTROL: - lectures -workshops - self-study	20/40 7/15 7/15 5/10
II	INTERMEDIATECONTROL: twoof 10controlpoints for each	10/20 (10*2=20)
	TOTAL:	30/60points
III	FINALEXAM	20/40
	Total	50/100points

 

Approximate scheme of the student’s grading at the exam

	Examination results	Evaluationin points ( в %)
1.	Currentcontrol
2.	Intermediatecontrol
3.	Final control

 

11.3 The student’s knowledge assessment scale
Scores in alphabetic system	The digital equivalent of the points	The percentage of points	Point on conventional system
А	4,0	95-100	excellent
А-	3,67	90-94
В+	3,33	85-89	good
В	3,0	80-84
В-	2,67	75-79
С+	2,33	70-74	satisfactory
С	2,0	65-69
С-	1,67	60-64
D+	1,33	55-59
D	1,0	50-54
F		0-49	unsatisfactory

 

 

Glossary of Economic Terms

 

Arbitrage: If someone takes advantage of different prices of the same security traded in two or more stock exchanges (by buying in one and selling in the other), it is called arbitrage.

Anti-Competitive Practice: A practice followed by a firm that restricts, distorts or eliminates competition to the disadvantage of other suppliers and consumers. Examples of restrictive practices include Exclusive Dealing, Refusal To Supply, Tie-In Sales, etc.

Administered Prices: Prices which are set by management decision rather than by negotiation between buyer and seller. True market prices are to be found only in the stock exchange and other places where prices change constantly. Most retail and industrial prices are set by management, though they will be altered in response to competition.

Anti-Trust (US): Legislation to control monopoly and restrictive practices in favour of competition. It applies not only to group of firms but also to single companies.

Average Cost: Total production costs per unit of output. It is calculated by adding total fixed costs to total variable costs and dividing by the number of units produced. The effect of indivisibilities is that average costs fall as output expands, spreading the fixed cost over more units.

Bank Rate: The interest rate at which the Central Bank of a country (Reserve Bank of India in case of India) lends to the banking system through rediscounting eligible bills of exchange and other commercial papers. Short-term interest rates are geared to the bank rate through the banking system.

Bad Delivery: The delivery of a share relating to the transaction is considered "BAD" when there are some defects in the share certificate or the transfer deed. SEBI has formulated uniform guidelines for good and bad delivery of documents. The bad delivery may pertain to the transfer deed being torn, mutilate, overwritten, defaced, etc.

Bonus: A free allotment of shares made in proportion to existing shares out of accumulated reserves. A bonus share does not constitute additional wealth to the shareholders. It merely signifies recapitalisation of reserves into equity capital. However, the expectation of bonus shares has a bullish impact on market sentiment and causes share prices to go up.

Balance of Trade: A statement of a country's trade in goods (visible) with the rest of the world over a particular period of time. The term specifically excludes trade in services (invisibles) and concentrates on the foreign currency earnings and payments associated with trade in finished manufactures, intermediate products and raw materials, which can be seen and recorded by a country's customs authorities as they cross national boundaries.

Benchmarking: The process of measuring a firm's performance and comparing this measured performance with that of other firms. Benchmarking can help a firm discover where its performance is deficient and can suggest means of improving competitive performance.

Bond: A financial security issued by businesses and by the government as a means of borrowing long-term funds. Bonds are typically issued for periods of several years; they are repayable on maturity and bear a fixed interest rate.

Buyer's Market: A short-run market situation wherein there is excess supply of goods or services at current prices, which brings price down to the advantage of the buyer.

Blue Chip: A first class equity share, which (the hope is), carries little risk of sharp declines in earning in economic recessions. In India, HLL, Infosys and Ranbaxy equities, for example, are commonly regarded as blue chips.

Bond: A fixed-interest security issued by central or local governments, companies, banks or other institutions. Bonds are usually a long-term security but do not always carry fixed interest and may be irredeemable and may be secured/ unsecured. There is no specific stock exchange for these bonds. The term bond has also been given to types of non-fixed-interest security, such as property bonds, which provide the holder with a yield of funds invested in property, or 'managed bonds', in which the bond includes debentures.

Budget: An estimate of income and expenditure for a future period as a opposed to an account, which records financial transactions. Budgets are an essential element in the planning and control of the financial affairs of a nation and of business, and are made necessary essentially because income and expenditure do not occur simultaneously.

Capital Formation: Net investments in fixed assets, i.e., additions to the stock of real capital. Gross fixed capital formation includes depreciation where as net capital formation excludes it.

Current Account: Current account is that portion of balance of payments, which portrays the market value of a country's visible (e.g. commodity trade) and invisible (e.g. shopping services) exports and imports with the rest of the world.

Capital Market: The market for long-term funds as distinct from the money market, which deals in short-term funds. There is no clear-cut distinction between the two markets, although in principle capital-market loans are used by industry and commerce mainly for fixed investment. The capital market is an increasingly international one and in any country is not one institution but all those institutions that match the supply and demand for long-term capital and claims on capital, e.g. the stock exchange, banks and insurance companies.

Cartel: An association of producers to regulate prices by restricting output and competition. They tend to be unstable because a single member can profit by undercutting the other, while price-fixing stimulates the development of substitutes. The most prominent example of an international cartel (oligopoly) is the Organization of Petroleum Exporting Countries (OPEC). In India, cement manufacturing, steel and iron manufacturing can be cited as examples of cartels or oligopolies.

Central Bank: A banker's bank and lender of last resort e.g. RBI. All developed and most developing countries have a central bank responsible for exercising control on the credit system, sometimes under instruction from government and, increasingly often, under its own authority. Central banks typically execute policy through their lead role in setting short-term interest rates, which they control by establishing the rate at which loans of last resort will be made.

Closed Economy: An economic system with little or no external trade, as opposed to an open one, in which a high proportion of output is absorbed by exports and similarly domestic expenditure by imports.

Commodity Exchange: A market in which commodities are bought and sold. It is not necessary for the commodities to be physically exchanged, only rights to ownership need to be exchanged.

Capital: The contribution to productive activity made by investment in physical capital (for example, factories, offices, machinery, tools) and in human capital (for example, general education, vocational training). Capital is one of the three main factors of production, the other two being labour and natural resources. Physical (and human) capital make a significant contribution towards economic growth.

Capital Account: The section of the National Income Accounts that records investment expenditure by government on infrastructure such as roads, hospitals and schools; and investment expenditure by the private sector on plant and machinery.

Capital Goods: The long-lasting durable goods, such as machine tools and furnaces, that are used as factor inputs in the production of other products, as opposed to being sold directly to consumers.

Cheap Money: A government policy whereby the Central Bank is authorized to purchase government bonds in the open market to facilitate an increase in the money supply.

Cheque: A means of transferring or withdrawing money from a Bank's current or savings account. In this case, the drawer of a cheque gives a written instruction to his bank to transfer funds to some other person's or company's bank. In the latter case money may be withdrawn in cash by a person or company writing out a cheque payable to themselves.

Consumer Durables: Consumer Goods, such as houses, cars, televisions, that are 'consumed' over relatively long periods of time rather than immediately.

Convertibility: The extent to which one foreign currency can be exchanged for some other foreign currency. International trade and investment opportunities are maximized when the currencies used to finance them are fully convertible, i.e. free of foreign exchange control restrictions.

Core Business: The particular products supplied by a firm, which constitute the heart of its business. These are generally products in which the firm has a competitive advantage.

Core Competence: A key resource, processor system of a firm, which lets it gain a competitive advantage over rivals.

Corporate Tax: A direct tax by the government on the profits of businesses. The rate of corporate tax charged is important to a firm as it determines the amount of after-tax profit it has available to pay dividends or to reinvest.

Cost of Capital: The payment made by a firm for using long-term capital used in business. The average cost of capital to a firm that uses several sources of long-term funds (loans, share capital) to finance its investments will depend upon the individual cost of each separate source (for example, interest on loans) weighted in accordance with the proportions of each source used.

Credit Card: A plastic card or token used to finance the purchase of products by gaining point-of-sale credit. Credit cards are issued by commercial banks, hotel chains and larger retailers.

Current Assets: Assets, such as stocks, money owed by debtors, and cash, that are held for short-term conversion within a firm as raw materials are bought, made up, sold as finished goods and eventually paid for.

Current Liabilities: All obligations to pay out cash at some date in the near future, including amounts that a firm owes to trade creditors and bank loans/overdrafts.

Consumer Good: An economic good purchased by households for final consumption. Consumer goods include, e.g., chocolate or draught beer consumed immediately as well as durable goods which, yield services over a period of time, for example a washing machine. It is the use to which it is put which determines whether a good is a consumer good, not the characteristics of the good itself. Electricity or a computer, bought for the home is a consumer good, but the same thing bought for a factory is a producer good.

Devaluation: Devaluation is the lowering of the official exchange rate between one country's currency and those of the rest of the world.

Dividend: That part of a company's profit, which Directors decide to distribute to the shareholders. It is generally expressed as a percentage of the nominal value of the capital to which it relates.

Development Banks: Development Banks are specialised public and private financial intermediaries providing medium and long-term credit for development project e.g. IDBI, IFCI etc.

Development Plan: Development Plan is the documentation by a government planning agency of the current national economic conditions, proposed public expenditures, likely development in the private sector, a macroeconomic projection of the economy and a review of Government policies. Many governments publish five year development plans to announce their economic objectives to their citizens and others.

Deflation: A sustained reduction in the general price levels. Deflation is often accompanied by declines in output and employment and is distinct from 'disinflation', which refers to a reduction in the rate of inflation. Deflation can be brought about by either internal or external forces in an open economy.

Demand: The desire and willingness to buy a particular good or service supported by the necessary money to buy it.

Demand-Pull Inflation: Inflation produced by a persisting excess of aggregate demand over aggregate supply. The excess demand probably persists because there is a growth in the quantity of money either through the creation of money by government to finance the budgetary gap between its expenditure and income or because the quantity of money is allowed to expand to accommodate the rise in prices.

Direct Inves tment: Investment in the foreign operations of a company through acquisition of a foreign operation, or establishment of a new ('greenfield') site. It is often referred to as Foreign Direct Investment (FDI). Direct investment implies control of managerial and perhaps technical input and is generally preferred by the host country to portfolio investment. This investment has been a major source of finance for the developing countries at a time when foreign aid has fallen.

Disguised Unemployment: A situation in which more people are available for work than is shown in the unemployment statistics. Married women, some students or prematurely retired persons may register for work only if they believe opportunities are available to them.

Diversification: Extending the range of goods and services in a firm or geographic region. The motives will include declining profitability or growth in traditional markets, surplus capital or management resources and a desire to spread risks and reduce dependency upon cyclical activities. Diversification has accounted for a significant proportion of the growth of multinational corporations, though more recently competitive pressures have encouraged large corporations to return to core businesses. This process has been called downsizing or divestment.

Diversification: The holding of stocks in a range of firms in a portfolio to spread the risk.

Depression: A business phase with a severe decline in economic activity (Actual Gross National Product). Real output and Investment are at very low levels and there is a high rate caused mainly by a fall in aggregate demand and can be reversed provided the authorities apply expansionary fiscal policy and monetary policy.

Deregulation: The removal of controls over economic activity that have been imposed by the government. It may be initiated either because the controls are no longer seen as necessary or because they are overly restrictive, preventing companies from taking advantage of business opportunities.

Devaluation: An administrated reduction in the exchange rate of a currency against other currencies under a Fixed Exchange - Rate System.

Developed Country: An economically advanced country whose economy is characterized by large industrial and service sectors, high levels of gross national product and Income Per Head.

Direct Tax: A tax levied by the government on the income and wealth received by individuals and business to raise revenue. Examples of direct taxes in India are Income Tax, Corporate Tax and Wealth Tax. Direct taxes are incurred on income received, unlike indirect taxes such as value-added taxes, which are incurred when income is spent. Direct taxes are progressive, insofar as the amount paid varies according to the income and wealth of the taxpayer. By contrast, Indirect Tax is regressive, insofar as the same amount is paid by each tax-paying consumer regardless of his income.

Dow-Jones Index: A US share price index that monitors and records the share price movements of all companies listed on the New York Stock Exchange, with the exception of high-tech companies listed separately on the NASDAQ stock exchange.

Downsizing: Large-scale shedding of employees by major corporations, sometimes also used to refer to the disposal of subsidiaries and other unwanted activities. Downsizing is generally a response to reduce costs and may in some cases be a delayed reaction to technological change which allows output to be maintained with fewer employees. In a dynamic and changing economy some firms will be reducing and other gaining employment, but redundancies by large firms attract more attention than widespread employment gains among smaller firms.

Duopoly: Two sellers only of a good or service in a market. A feature of this situation is that any decision by one seller, such as the raising or lowering of his price, will stimulate a response from the other which, in turn, will affect the market response to the first seller's initial responses, price equilibrium may exist at any point between that of a monopolist and that of perfect competition.

Emerging Markets: I. Markets in securities in newly industrialized countries and in countries in Central and Eastern Europe and elsewhere, in transition from planned economies to free-market economies and in developing countries with capital markets at an early stage of development.

Engel's Law: A law that with given tastes or preferences, the proportion of income spent on food diminishes as incomes increases.

Expenditure Tax: A form of indirect tax that is included into the selling price of a product and is paid by the consumer. In raising revenue and in applying Fiscal Policy, governments have two broad choices; the use of taxes on expenditure and those on income. Taxes on income, such as Income Tax, deduct tax at source, whereas taxes on expenditure are levied at the point of sale. Direct taxes tend to be Progressive Taxes in so far as the amount of tax paid is related to a person's income, whereas expenditure taxes are regressive taxes in so far as consumers pay tax in proportion to their spending regardless of income.

Export-Led Growth: An expansion of the economy with exports serving as a leading sector. Rising exports inject additional income into the domestic economy and increase total demand for domestic output. Equally importantly, the increase in exports enables a higher level of import absorption to be accommodated so that there is no balance of payments constraint on the achievement of sustained economic growth.

Entrepreneur: An economic agent who perceives market opportunities and assembles the factors of production to exploit them in a firm. The essence of the entrepreneur, therefore, is that he is alert to gaps in the market, and is able to raise resources to exploit the market. If successful he will make a super-normal profit that will later reduce to normal profits as new competitors are attracted into the market. In this conception, the pure function of the entrepreneur is as fourth factor of production.

Factor Cost: The value of goods and services produced, measured in terms of the cost of the inputs (materials, labour etc) used to produce them, but excluding any indirect taxes/ subsidies. For example, a product costing Rs.10 to produce and with a Rs.1 indirect tax levied on it would have a market price of Rs.11 and a factor cost of Rs.10.

Foreign Direct Investment (FDI): Investment by a multinational company in establishing production, distribution or marketing facilities abroad. Sometimes foreign direct investment takes the form of greenfield investment, with new factories, warehouses or offices being constructed overseas and new staff recruited. Alternatively, foreign direct investment can take the form of takeovers and mergers with other companies located abroad. Foreign direct investment differs from overseas portfolio investment by financial institutions, which generally involves the purchase of small shareholding in a large number of foreign companies.

Free Trade: The international trade that takes place without barriers, such as tariffs, quotas and foreign exchange controls, being placed on the free movement of goods and services between countries. The aim of free trade is to secure the benefits of international specialization. Free trade as a policy objective of the international community has been fostered both generally by the World Trade Organization and on a more limited regional basis by the established of various Free Trade Areas, Custom Unions and Common Markets.

Free-Market Economy: Strictly, an economic system in which the allocation of resources is determined solely by supply and demand in free markets, though there are some limitations on market freedom in all countries. Moreover, in some countries, governments intervene in free markets to promote competition that might otherwise disappear. Usually used synonymously with capitalism.

Free-Trade Zone: A customs-defined area in which goods or services may be processed or transacted without attracting taxes or duties or being subjected to certain government regulations. A special case is the freeport, into which goods are imported free of customs tariffs or taxes.

Frictional Unemployment: Frictional unemployment arises because of time lags in the functioning of labour markets which are inevitable in a free-market economy; there are search delays involved, for example in moving from one job to another. Frictional unemployment is conceptually distinct from structural unemployment, which results in heavy local concentration of unemployment, and of course, from unemployment arising from a deficiency of demand.

Gross Domestic Product (GDP): A measure of the total flow of goods and services produced by the economy over a specified time period, normally a year or a quarter. It is obtained by valuing outputs of goods and services at market prices, and then aggregating. Note that all intermediate goods are excluded, and only goods used for final consumption or investment goods or changes in stocks are included. The word 'gross' means that no deduction for the value of expenditure on capital goods for replacement purposes is made.

Gross National Product (GNP): Gross Domestic Product plus the income from investment abroad minus income earned in the domestic market going to foreigners abroad.

Giffen Goods: A good for which quantity demanded increases as its price increases, rather than falls, as predicted by the general theory of demand. It applies only in the highly exceptional case of a good that accounts for such a high proportion of household budgets that an increase in price produces a large negative income effect, which completely overcomes the normal substitution effect.

Globalization: The tendency for markets to become global, rather than national, as barriers to international trade (e.g. tariffs) are reduced and international transport and communications improve; and the tendency for large multinational companies to grow to service global markets.

Great Depression: The Depression that was experienced by many countries in the decade 1929-39. The Great Depression was associated with very high unemployment levels and low production and investment levels in the US and Europe, and with falling levels of international trade.

Gresham's Law: The economic hypothesis that 'bad' money forces 'good' money out of circulation. The principle applies only to economies whose domestic money system is based upon metal coinage that embodies a proportion of intrinsically valuable metals such as silver and gold. Where governments issue new coins embodying a lower proportion of valuable metals, people are tempted to hoard the older coins for the commodity value of their metal content so that the 'good' money ceases to circulate as currency.

Hedge: Action taken by a buyer or seller to protect his business or assets against a change in prices. A flour miller who has a contract to supply flour at a fixed price in two months' time can hedge against the possibility of a rise in the price of wheat in two months' time by buying the necessary wheat now and selling a two months' future in wheat for the same quantity. If the price of wheat should fall, then the loss he will have sustained by buying it now will be offset by the gain he can make by buying in the wheat at the future price and supplying the futures contract at higher than this price, and vice versa.

Inflation: Persistent increase in the general level of prices. It can be seen as a devaluing of the worth of money.

Indicative Plannin g: A method of controlling the economy that involves the setting of long-term objectives and the mapping out of programmes of action designed to fulfill these objectives. Unlike a centrally planned economy, indicative planning works through the market rather than replaces it. To this end, the planning process specifically brings together both sides of industry (the trade unions and management) and the government.

Indirect Tax: A tax levied by the government that forms part of the purchase price of goods and services. Examples of indirect taxes are Value Added Tax, Excise Duty, and Sales Tax. Indirect taxes are referred to as 'expenditure' taxes since they are incurred when income is spent, unlike Direct Taxes, such as Income Tax, which are incurred when 'income' is received.

International Monetary Fund (IMF): Multination institution set up in 1947 (following the Bretton Woods Conference, 1944) to supervise the operation of a new international monetary regime. The IMF is based in Washington DC and currently has a membership of 181 countries. The Fund seeks to maintain cooperative and orderly currency arrangements between member countries with the aim of promoting increased International Trade and Balance of Payments Equilibrium.

Labour Intensive Firm/Industry: A firm that produces its output of goods or services using proportionately large inputs of labour and relatively small amounts of capital. Clothing manufacture, plumbing and hairdressing are examples of labour-intensive industries.

Money Supply: The amount of money in circulation in an economy. Money supply can be specified in a variety of ways and the total value of money in circulation depends the definition of money supply. Narrow definitions of money supply include only assets withpossessing ready liquidity. 'Broad' definitions include other assets, which are less liquid but are important in underpinning spending. The size of the money supply is an important determinant of the level of spending in the economy and its control is a particular concern of monetary policy.

Multilateral Trade: International trade among all countries engaged in the export and import of goods or services.

NASDAQ (National Association of Security Dealers' Automated Quotation): The exchange in New York that specializes in high-tech companies such as Microsoft, Dell and Amazon. The NASDAQ share price index monitors and records the share price movements of the companies listed in the exchange.

Opportunity Cost: The value of that which must be given up to acquire or achieve something. Economists attempt to take a comprehensive view of the cost of an activity.

 

Paper Profit: An unrealized money increase in the value of an asset. An individual, for example, will have made a paper profit on his house if it is worth more now that it was when he bought it.

Per Capita Income: Income per head, normally defined as the national income divided by the total population. International comparisons of per capita income at current exchange rates need to be interpreted with caution.

Parkinson's La w: An observation by Professor C. Northcote Parkinson suggesting that work expands according to the time available in which to do it.

Progressive Taxation: A system in which tax is levied at an increasing rate as taxation rises. This form of taxation takes a greater proportion of tax from the high-income taxpayer. The greater the individual's earnings, the greater the rate of tax that is levied.

Planned Economy: An economy in which state authorities rather than market forces directly determine prices, output and production. Although planned economies can take a variety of forms, their most important features usually include:

(a) production targets for different sectors, of the economy, that determine the supply of different targets for different sectors of the economy, that determine the supply of different commodities;

(b) rationing of certain commodities to determine demand for them;

(c) price-and wage-fixing by state bodies;

Recession: A phase of the business cycle characterized by a modest downturn in economic activity. Real output and investment fall, resulting in rising unemployment. A recession is usually caused by a fall in aggregate demand, and provided that the authorities evoke expansionary fiscal policy and monetary policy, it can be reversed.

Reflation: An increase in the level of National Income and output. Reflation is often deliberately brought about by the authorities to secure full employment and to increase the rate of economic growth. Instruments of reflationary policy include fiscal measures (for example, tax cuts) and monetary measures (for example, lower interest rates).

Recession: An imprecise term given to a sharp slowdown in the rate of economic growth or a modest decline in economic activity, as distinct from a slump or depression which is a more severe and prolonged downturn. Recessions are a feature of the business cycle. Two successive declines in seasonally adjusted, quarterly, real gross domestic product would constitute a recession.

Shell Company: A company that is not actively trading but that is still listed on the stock exchange. Such a company can be purchased in a reverse takeover by a company wishing to obtain a stock-exchange listing.

Trade Deficit: The amount by which merchandise imports exceed merchandise exports.

Lecture materials

Economics as a science

The purpose: Review the major aspects of the economics, its scope and method

Key words: economics, method, study, opportunity cost, marginalism, efficient markets, industrial revolution, normative economics, positive economics

Questions:

1.1Why Study Economics?

1.2 The Scope of Economics

1.3 The Method of Economics

1.4 Appendix: How to Read and Understand Graphs

 

Why Study Economics?

Economics. The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. The key word in this definition is choose. Economics is a behavioral, or social, science. In large measure, it is the study of how people make choices. The choices that people make, when added up, translate into societal choices.

Three fundamental concepts:

§ Opportunity cost

§ Marginalism

§ Efficient markets

Opportunity cost. The best alternative that we forgo, or give up, when we make a choice or a decision(scarce Limited).

Marginalism. The process of analyzing the additional or incremental costs or benefits arising from a choice or decision (sunk costs. Costs that cannot be avoided because they have already been incurred.).

Efficient market. A market in which profit opportunities are eliminated almost instantaneously.

Industrial Revolution. The period in England during the late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities.

An understanding of economics is essential to an understanding of global affairs. To be an informed citizen requires a basic understanding of economics.

 

 

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, 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.

Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.”

 

TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns
Divisions of Economics	Production	Prices	Income	Employment
Microeconomics	Production/output in individual industries and businesses How much steel How much office space How many cars	Price of individual goods and services Price of medical care Price of gasoline Food prices Apartment rents	Distribution of income and wealth Wages in the auto industry Minimum wage Executive salaries Poverty	Employment by individual businesses and industries Jobs in the steel industry Number of employees in a firm Number of accountants
Macroeconomics	National production/output Total industrial output Gross domestic product Growth of output	Aggregate price level Consumer prices Producer prices Rate of inflation	National income Total wages and salaries Total corporate profits	Employment and unemployment in the economy Total number of jobs Unemployment rate

 

TABLE 1.2 The Fields of Economics
Behavioral economics	uses psychological theories relating to emotions and social context to help understand economic decision making and policy. Much of the work in behavioral economics focuses on the biases that individuals have that affects the decisions they make.
Comparative economic systems	examines the ways alternative economic systems function. What are the advantages and disadvantages of different systems?
Econometrics	applies statistical techniques and data to economic problems in an effort to test hypotheses and theories. Most schools require economics majors to take at least one course in statistics or econometrics.
Economic development	focuses on the problems of low-income countries. What can be done to promote development in these nations? Important concerns of development for economists include population growth and control, provision for basic needs, and strategies for international trade.
Economic history	traces the development of the modern economy. What economic and political events and scientific advances caused the Industrial Revolution? What explains the tremendous growth and progress of post-World War II Japan? What caused the Great Depression of the 1930s?
Environmental economics	studies the potential failure of the market system to account fully for the impacts of production and consumption on the environment and on natural resource depletion. Have alternative public policies and new economic institutions been effective in correcting these potential failures?
Finance	examines the ways in which households and firms actually pay for, or finance, their purchases. It involves the study of capital markets (including the stock and bond markets), futures and options, capital budgeting, and asset valuation.
Health economics	analyzes the health care system and its players: government, insurers, health care providers, and patients. It provides insight into the demand for medical care, health insurance markets, cost-controlling insurance plans (HMOs, PPOs, IPAs), government health care programs (Medicare and Medicaid), variations in medical practice, medical malpractice, competition versus regulation, and national health care reform.
The history of economic thought,	which is grounded in philosophy, studies the development of economic ideas and theories over time, from Adam Smith in the eighteenth century to the works of economists such as Thomas Malthus, Karl Marx, and John Maynard Keynes. Because economic theory is constantly developing and changing, studying the history of ideas helps give meaning to modern theory and puts it in perspective.
Industrial organization	looks carefully at the structure and performance of industries and firms within an economy. How do businesses compete? Who gains and who loses?
International economics	studies trade flows among countries and international financial institutions. What are the advantages and disadvantages for a country that allows its citizens to buy and sell freely in world markets? Why is the dollar strong or weak?
Labor economics	deals with the factors that determine wage rates, employment, and unemployment. How do people decide whether to work, how much to work, and at what kind of job? How have the roles of unions and management changed in recent years?
Law and economics	analyzes the economic function of legal rules and institutions. How does the law change the behavior of individuals and businesses? Do different liability rules make accidents and injuries more or less likely? What are the economic costs of crime?
Public economics	examines the role of government in the economy. What are the economic functions of government, and what should they be? How should the government finance the services that it provides? What kinds of government programs should confront the problems of poverty, unemployment, and pollution? What problems does government involvement create?
Urban and regional economics	studies the spatial arrangement of economic activity. Why do we have cities? Why are manufacturing firms locating farther and farther from the center of urban areas?

 

While many transactions happen in anonymous markets in which buyers and sellers don’t know one another, there are many other occasions in which markets operate more effectively if individuals develop some trust in one another.

In experiments run at the University of Wisconsin and the University of Miami, researchers conclude, “We find that men trust more than women, and women are more trustworthy than men.”

 

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.

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.

Descriptive economics. The compilation of data that describe phenomena and facts.

Economic theory. A statement or set of related statements about cause and effect, action and reaction.

Theories and Models

-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.

-Ockham’s razor. The principle that irrelevant detail should be cut away.

- 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. Using the device of ceteris paribus is one part of the process of abstraction. In formulating economic theory, the concept helps us simplify reality to focus on the relationships that interest us.

- Expressing Models in Words, Graphs, and Equations. Methods of expressing the quantitative relationship between two variables: Graphing (as presented in appendix); Equations. For example: If over time U.S. households collectively spend, or consume, 90 percent of their income and save 10 percent of their income.

Cautions and Pitfalls.

-post hoc, ergo propter hoc. Literally, “after this (in time), therefore because of this.” A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.

- fallacy of composition. The erroneous belief that what is true for a part is necessarily true for the whole.

Testing Theories and Models: Empirical Economics. The collection and use of data to test economic theories.

Economic Policy. Criteria for judging economic outcomes:

1. Efficiency

2. Equity

3. Growth

4. Stability

-Efficiency. In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.

-Equity. Fairness.

-Economic growth. An increase in the total output of an economy.

- Stability. A condition in which national output is growing steadily, with low inflation and full employment of resources.