THE SCOPE AND METHOD OF

ECONOMICS
LECTURE 1 - CH. 0

Dr. Abbas Ali Gillani

Assistant Professor, IBA
WHY STUDY ECONOMICS

 Economics is the study of how individuals and societies

choose to use scarce resources.

There are three main reasons why we study economics:

 1) To Learn a Way of Thinking:

 Opportunity cost is the best alternative that we

forgo, or give up, when we make a decision.

 It arises because resources are scarce (limited).

 Marginalism is the process of analyzing the

additional or incremental costs of benefits arising
from a decision.
 There is no such thing as a free lunch.

 Efficient markets are those where profit

opportunities are eliminated almost instantaneously.
WHY STUDY ECONOMICS

 2) To Understand Society:
 Past and present decisions have enormous influence
on the character of life in a society, and on the future.
 Industrial Revolution is one of the greatest

recent impact of economic change on a society.

 To study economics is in a way to study society.

 3) To Be an Informed Citizen:
 Understanding what happens in recessions and
crises are integral to your decision-making.
 Knowing what economic policies are implemented
in your country help you understand your own
society.
 At the end of the day, you live in an economic global
village where you must be well informed to make
rational, optimal decisions.
SCOPE OF ECONOMICS

 Microeconomics is the branch of economics that examines

the functioning of individual industries and the behavior of
individual decision-making units i.e. firms and households.
 Production in individual industry and businesses.

 Price of individual goods and services.

 Distribution of income and wealth on a unit level.

 Employment by individual industry and businesses.

 Macroeconomics is the branch of economics that examines

the economic behavior of aggregates on a national scale.
 National production or output.

 Aggregate price level in the economy.

 National income or GDP of the country.

 Employment in the economy.

FIELDS OF ECONOMICS

 Behavioral Economics.
 Comparative Economic Systems.

 Econometrics.

 Economic Development.

 Economic History.

 Environmental Economics.

 Finance.

 Health Economics.

 The History of Economic Thought.

 Industrial Organization.

 International Economics.

 Labor Economics.

 Law and Economics.

 Public Economics.

 Urban and Regional Economics.

METHOD OF ECONOMICS

 Positive economics attempts to understand behavior and

the operation of economic systems without making judgments.
 It describes what exists and how it works.

 What happens if we abolish the corporate tax?

 How much will a bailout effect Pakistan’s reserves?

 Will standardizing education increase enrolment?

 Normative economics looks at the outcomes of economic

behavior and asks whether they are good or bad.
 It involves judgments and prescriptions for course
of action.
 This method is often called policy economics.

 Should government subsidize higher education?

 Should we reduce government expenditure on VIP

protocols?
THEORIES AND MODELS

 A model is a formal statement of a theory:

 It is usually a mathematical statement of a
presumed relationship between two or more variables.

 A variable is a measure that can change across time or

observations:

 In order to study theories and models, it is necessary to pay

attention to three things:

 1) Ceteris Paribus is a mechanism used to analyze the

relationship between two variables while the value of other
variables are held unchanged:
 It is also referred to as All Else Equal.

 Needed to isolate or separate effects.

 How much did violence impact enrolment rates?

THEORIES AND MODELS

 2) The expressing of models can be in words, graphs or

equations:
 Graphical illustration is one of the most powerful

tools in explaining models.

 They can depict trends, fluctuations and anomalies.

 Equations assist in extreme precision of models.

 They can help us find exact values and outcomes.

3) It is important to know the difference between causality

and causation:
 Causality is when an observed action appears to
have caused another event or action.
Correlation is the relationship between two sets of
variables.
 Correlation does not imply causality!
THEORIES AND MODELS

 Economics, like all sciences, also relies on scientific method:

 Observing real-world behavior and outcomes.

 Formulating a possible explanation – hypothesis

 Testing the hypothesis by comparing predicted and

actual outcomes.
 Accepting, rejecting, and modifying the hypothesis
based on comparisons.
 Continuing to test the hypothesis against the facts.

 A very well-tested and widely accepted theory is referred to

as an economic law or an economic principle:
 A statement about economic behavior of the
economy that enables prediction of the probable
effects of certain actions.
 Highly useful in analyzing behavior and outcomes.

 These principles are tools of ascertaining cause and

effect within the economic system.
ECONOMIC POLICY

Economic theory helps us understand how the world works,

but the formulation of economic policy must have objectives:
 What do we want to change?

 Can we make it better?

 Why do we want to change the system?

 Four criteria are frequently applied in judging economic

outcomes.

 1) Efficiency, which is referred to as allocative efficiency in

economics, is referred to as an economy that produces what
people want at the least possible cost:
 Inefficient is when a system allocates resources to
the production of goods and services that nobody
wants.
ECONOMIC POLICY

 2) Equity (fairness) lies in the eye of the beholder:

 For some, fairness implies an equitable distribution
of wealth and income.
 For others, it involves people getting what they

earn.

 3) Economic growth is an increase in the total output of an

economy:
 It is a result of change in inputs and technology.

Some policies encourage economic growth, while

other discourage them.

 4) Stability is a condition in which national output grows

steadily, with low inflation and full employment or resources:
 Trends are extremely important for stability.

 Macroeconomics deals with this comprehensively.