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The scope of economics
A social science deals with some aspect or aspects of human society. Economics is a social science
which is concerned with the allocation of scarce resources to provide goods and services which meet
the needs and wants of consumers.
Rationality
One of the important assumptions in economics, and one on which much economic theory is based, is
the rationality of human behaviour. In order to make predictions about their economic behaviour,
economists assume that human behaviour is 'rational' and that consumers and producers act rationally.
For example, producers and consumers will make reasoned decisions about how much to produce or
buy at any given price.
The optimum
The assumption of the rationality of human behaviour, and that people will take decisions and actions
which are directed towards a rational objective, leads us to the concept in economics of the optimum.
The optimum means the best possible, and the following are underlying assumptions in much economic
analysis.
(a) Producers will seek to maximise their profits and returns.
(b) Consumers will seek to maximise the benefits they obtain (their 'utility') from using the
income at their disposal.
(c) Governments will seek to maximise the well being of their population (for example, by
maximising the national income per head of the population).
Positive and normative economics
You might already have strong personal views about what sort of economic society we should have,
e.g. whether a free market 'capitalist' economy is desirable, or whether a centrally planned 'command'
economy is preferable. In the study of economics, it is easy for us to be influenced in our views by our
ideas of 'what ought to be'.
Economists also have views on these subjects, and some economic writing is aimed at influencing
decision makers by prescribing actions, which, in the opinion of the author, will lead to ends, which he
or she considers desirable. Other economic research, however, is directed purely to finding out what the
consequences will be if certain actions are taken, without expressing any view on the desirability of
those consequences. These two different approaches are referred to as normative economics and
positive economics.
(a) Normative economics is concerned with the expression of value judgements by economists, of
what they would like to happen -e.g. what sort of economic society they would like to see in
operation.
(b) Positive economics is concerned with objective statements about what does happen or what
will happen. A positive approach is more objective, and more scientific, and it is the approach
we shall try to take in our study of economics here.
Microeconomics and macroeconomics
The study of economics is divided into two halves, microeconomics and macroeconomics.
(a) 'Micro' comes from the Greek word meaning small, and microeconomics is the study of
individual economic units or particular parts of the economy -e.g. how does an individual
household decide to spend its income? How does an individual firm decide what volume of
output to produce or what products to make? How is the price of an individual product
determined? How are wage levels determined in a particular industry?
(b) 'Macro' comes from the Greek word meaning large, and macroeconomics is the study of
'global' or collective decisions by individual households or producers. It looks at a national or
international economy as a whole -e.g. total output, income and expenditure, unemployment,
inflation, interest rates and the balance of international trade etc, and what economic policies a
government can pursue to influence the condition of the national economy.
In this text, we shall study microeconomics first before going on to look at the macroeconomic
environment in later chapters.
The fundamental problem of economics
A fundamental concept in economics is the scarcity of resources. There are not enough resources to
meet the needs of consumers and producers.
(a) In the case of consumers, the scarcity of goods and services might seem obvious enough.
Everyone would like to have more -another car, a bigger home, more domestic goods, better
food and drink, more holidays, more trips to the cinema or theatre, a boat, a private plane,
membership of more clubs and societies, more clothes and so on. There simply isn't enough to
go round to satisfy the potential demand.
(b) In the case of producers, there are four scarce resources:
(i) natural resources, referred to collectively as 'land';
(ii) labour;
(iii) capital -e.g. equipment and tools;
(iv) enterprise or entrepreneurship.
Scarce resources mean that producers cannot make unlimited Quantities of goods and services.
Since resources for production are scarce and there are not enough goods and services to satisfy the
total potential demand, choices must be made. Choice is only necessary because resources are scarce.
(a) Consumers must choose what goods and services they will have.
(b) Producers must choose how to use their available resources, what goods and services to
produce, and in what quantities.
The fundamental problem of economics is the allocation of these scarce resources. What will be
produced? What will be consumed? And who will benefit from the consumption?
A social science deals with some aspect or aspects of human society. Economics is a social science
which is concerned with the allocation of scarce resources to provide goods and services which meet
the needs and wants of consumers.
Rationality
One of the important assumptions in economics, and one on which much economic theory is based, is
the rationality of human behaviour. In order to make predictions about their economic behaviour,
economists assume that human behaviour is 'rational' and that consumers and producers act rationally.
For example, producers and consumers will make reasoned decisions about how much to produce or
buy at any given price.
The optimum
The assumption of the rationality of human behaviour, and that people will take decisions and actions
which are directed towards a rational objective, leads us to the concept in economics of the optimum.
The optimum means the best possible, and the following are underlying assumptions in much economic
analysis.
(a) Producers will seek to maximise their profits and returns.
(b) Consumers will seek to maximise the benefits they obtain (their 'utility') from using the
income at their disposal.
(c) Governments will seek to maximise the well being of their population (for example, by
maximising the national income per head of the population).
Positive and normative economics
You might already have strong personal views about what sort of economic society we should have,
e.g. whether a free market 'capitalist' economy is desirable, or whether a centrally planned 'command'
economy is preferable. In the study of economics, it is easy for us to be influenced in our views by our
ideas of 'what ought to be'.
Economists also have views on these subjects, and some economic writing is aimed at influencing
decision makers by prescribing actions, which, in the opinion of the author, will lead to ends, which he
or she considers desirable. Other economic research, however, is directed purely to finding out what the
consequences will be if certain actions are taken, without expressing any view on the desirability of
those consequences. These two different approaches are referred to as normative economics and
positive economics.
(a) Normative economics is concerned with the expression of value judgements by economists, of
what they would like to happen -e.g. what sort of economic society they would like to see in
operation.
(b) Positive economics is concerned with objective statements about what does happen or what
will happen. A positive approach is more objective, and more scientific, and it is the approach
we shall try to take in our study of economics here.
Microeconomics and macroeconomics
The study of economics is divided into two halves, microeconomics and macroeconomics.
(a) 'Micro' comes from the Greek word meaning small, and microeconomics is the study of
individual economic units or particular parts of the economy -e.g. how does an individual
household decide to spend its income? How does an individual firm decide what volume of
output to produce or what products to make? How is the price of an individual product
determined? How are wage levels determined in a particular industry?
(b) 'Macro' comes from the Greek word meaning large, and macroeconomics is the study of
'global' or collective decisions by individual households or producers. It looks at a national or
international economy as a whole -e.g. total output, income and expenditure, unemployment,
inflation, interest rates and the balance of international trade etc, and what economic policies a
government can pursue to influence the condition of the national economy.
In this text, we shall study microeconomics first before going on to look at the macroeconomic
environment in later chapters.
The fundamental problem of economics
A fundamental concept in economics is the scarcity of resources. There are not enough resources to
meet the needs of consumers and producers.
(a) In the case of consumers, the scarcity of goods and services might seem obvious enough.
Everyone would like to have more -another car, a bigger home, more domestic goods, better
food and drink, more holidays, more trips to the cinema or theatre, a boat, a private plane,
membership of more clubs and societies, more clothes and so on. There simply isn't enough to
go round to satisfy the potential demand.
(b) In the case of producers, there are four scarce resources:
(i) natural resources, referred to collectively as 'land';
(ii) labour;
(iii) capital -e.g. equipment and tools;
(iv) enterprise or entrepreneurship.
Scarce resources mean that producers cannot make unlimited Quantities of goods and services.
Since resources for production are scarce and there are not enough goods and services to satisfy the
total potential demand, choices must be made. Choice is only necessary because resources are scarce.
(a) Consumers must choose what goods and services they will have.
(b) Producers must choose how to use their available resources, what goods and services to
produce, and in what quantities.
The fundamental problem of economics is the allocation of these scarce resources. What will be
produced? What will be consumed? And who will benefit from the consumption?
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