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Definition and methodology in economics

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  • 1. BHARAT POUDEL Definition and Methodology in Economics
  • 2. Scheme of Presentation Definition of Economics By Adam Smith, Marshall and Robbins
  • 3. Definition of Economics  Economics is a social science, a body of models and theories that explains the real world phenomena. Based on real world phenomena, economics makes assumptions, builds hypothesis from those assumptions and tests the hypothesis before developing it up into a theory.
  • 4. Adam Smith  Adam Smith (1723 - 1790) - Scottish philosopher and economist, author of: Inquiry into the Nature and Causes of the Wealth of Nations (1776). Before Smith there was no economic discussion and after Smith people started discussing about Economics. In this sense he is known as the father of Economics
  • 5. Defining Economics  Economics as a Science of Wealth – Adam Smith  The last quarter of the eighteenth century heralded a new era in the field of economics. In the year 1776 a book was published by Adam Smith, a Scottish philosopher turned economist. The title of the book was – An Inquiry into the Nature and Causes of the Wealth of Nations, popularly known as 'The Wealth and Nations‘  Main Idea of Adam Smith Definition  Study of wealth  Source of wealth  Study of economic man  Primary place to wealth
  • 6. Alfred Marshall  Alfred Marshall (1842 - L924) - British economist, who envisaged price determination as the outcome of the interaction of market demand and market supply, author of 'The Principle of Economics' (1890).
  • 7. Economics as a Science of Material Welfare -Alfred Marshall  In the year 1890, Alfred Marshall, a British economist, published a book entitled the 'Principles of Economics'. Marshall defined Economics in the following words - Economics is a study of mankind in the ordinary business of life. It examines that parts of individual and social actions which are closely related the well being of individuals.  Main Idea of Marshallian Definition of Economics  Welfare is the Primary Concern  Study of ordinary man  Study of material welfare
  • 8. Lionel Robbins  Lionel Robbins (1898 - 1984) - British economist, writer of 'An Essay on the Nature and Significance of Economic Science' (1935) who stressed the aspect of scarcity in all economic behaviour
  • 9. Economics as a Science of Scarcity and Choices - Robbins  Lionel Robbins, a British economist, criticized Marshall's definition of Economics and proposed his own definition in the book 'An Essay on the Nature and Significance of Economic Science'. The book was published in 1935 wherein Robbins laid emphasis on the scarcity aspect of resources in all economic activities. Robbins defined Economics as- The science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.  Mani Idea of Robbins Definition  Unlimited ends  Scarce means or resources  Alternative use of resources
  • 10. Micro and Macro Economics  Micro Economics It is that part of the economic analysis which is concerned with the behaviour of individual units: consumers and firms. It examines how consumers choose between goods, how workers choose between jobs, and how a business firm decides what to produce and what production methods to use.
  • 11. Use/Importance of Microeconomics  Determination of Price  Allocation of the Resources and Economic Efficiency  Welfare Economics  Tool for Policy Design and Evaluation  Tool for other branches of the Economics
  • 12. Determination of Price  Microeconomics helps us to understand the price determination process under different market structures  Demand, Supply and Market  This is very important as Price acts as Information for Economic Decision making units which facilitates decisions
  • 13. Allocation of Resources and Economic Efficiency  Tells the process of Resource Allocations-role of economic agents and resource allocation process  Eg Circular Flow of Income and Expenditure  Eg. How consumer is spending his/her money income, or supply labor etc.  It also establishes conditions for ensuring economic efficiency(?)  Efficient condition for consumption (exchange), production and mix of both. (pareto efficient)  A perfectly competitive market ensures economic efficiency
  • 14. Allocation…………………….  These Conditions serves as benchmark for comparison if there are imperfections in the market  If there are imperfections, this invites the regulatory role of the public institutions (market failure arguments) Monopoly, Monopsony Markets Externalities
  • 15. Welfare Economics  Pareto Efficiency  Pareto Optimum and Social Optimum Classical-Adam Smith Utilitatirian (interpersonal comparison and costs benefits analysis) Social welfare function and Social Optimum  Two Fundamental Theorems of Welfare (?)
  • 16. Tool for Policy Design and Evaluation  Microeconomics is used as tool for public policy design and Evaluation  Public Policy (like change in tax and subsidy, government expenditure etc.)  Examples: impact of tax using demand and supply framework (think is increase in VAT rate will necessarily increase revenue collection?)  Welfare Impact Analysis: Compensating and Equivalent Variations
  • 17. Tool for Other Branches of Economics  Managerial Economics  Environmental Economics  International Economics  Public finance  Health Economics
  • 18. Macro Economics  Macroeconomics is the study of the behaviour of the economy as a whole, such as national income, total consumption, saving, investment, total employment, general price level etc. In macroeconomics, we worry about aggregate economic goals such as full employment, control of inflation, economic stability and growth without considering the behaviour of individual consumers or firms.
  • 19. Use/Importance of Macro Economics