The nature and scope of economics.

(i) Scope of economics

Question; how does economics differ from other subjects?

Economics involves the study of the problem of production, consumption, exchange and distribution of wealth as well as the determination of the values of goods and services. Besides, economics makes an inquiry into the possible causes and remedies of poverty, unemployment, underdevelopment, inflation etc.

The subject consists of a body of general principals and theories which may be applied to the interpretation of all economic problems, post and present. The fundamental economic problem of all nations seeks to address the following issues.

 What goods and services to produce?

 How to produce them?

 For whom to produce?

        (ii)       Methodology of economics.

Economics proceeds as an evolutionary discipline, looking at data, developing hypotheses, testing them and reaching sometimes uneasy consensus on how the economy works.

There are two approaches to the study of economics namely positive and normative analysis.

Positive analysis (deductive): is more central to micro-economics and it is concerned with what is, what was, and what will be. That is, it is more specific and objective. It employs economic theory in explaining and predicting circumstances. The economic theories are tested against observations and are used to construct models from which prediction are made.

A theory therefore is a reasoned assumption intended to explain an occurrence or a phenomenon. A model on the other hand is a mathematical representation based on the economic theory.

Economic theory refers to a body of economic principles built up as a result logical reasoning.it provides the tools of economic analysis .it is pursued irrespective of whether it appears to be of any practical advantage

In case of controversies in positive analysis, we refer to economic theories that have been proven through empirical observations.

Normative analysis (inductive): goes beyond theory to ask questions like “what is best, what ought to be” etc. it is subjective meaning that it depends on value judgment on what is desirable.

In case of controversies, individual policy choices will rule. It is concerned with alternative policy actions that helps in illuminating and sharpening debates.

Example to help distinguish between positive and normative.

Assume the Government imposes tax on a good; the effect of this would be 

 Increase price of commodity

 Good will be expensive than competing product

 As quantity demanded falls, firms to decrease number of workers employed.

(Positive analysis; what is, what will be)

Normative analysis: For the firm on whom the product has been imposed they would ask; what should they do to improve their sales?

How should they improve competitiveness (normative – what ought to be)

BRANCHES OF ECONOMICS

Economics is divided into two main branches: – microeconomics and macroeconomics.

Microeconomics

“micro” comes from the Greek word meaning small. Deals with the behaviors of individual economic units. These units include consumers, workers, investors, owners of; land, business firms, in fact any individual or entity that plays a role in the function of our economy.

 Microeconomics explains how and why these units make economic decisions. For example, it explains how consumers make purchasing decision and how their choices are affected by changing prices and income

 It also explains how firms decide how many workers to hire and how workers decide where to work and how much work to do.

 Another important concern of microeconomics is how economic units interact to form large units-markets and industries. By studying the behavior and interaction of individual firm and consumers, microeconomics reveals how industries and markets operate and evolve, why they differ from one another, and how they are affected by government policies and global economic conditions.

Macroeconomics

“macro” comes from the Greek word meaning large, by contrast, macroeconomics, the other major branch of economics, deals with aggregate economic quantities, such as the level and growth rate of national output, interest rates, unemployment and inflation.

 But the boundary between macroeconomics has become less and less distinct in the recent years. The reason is that macroeconomics also involves the analysis of markets for goods and services and for labour.

 To understand how these aggregate markets, operate, one must first understand the behavior of the firms, consumers, workers, and investors who make up these markets. Thus, macroeconomists have become increasingly concerned with microeconomics foundation of aggregate economic phenomena and much of macroeconomics is actually an extension of microeconomic analysis