WHAT IS ECONOMICS ABOUT?

The word economics come from the ancient Greek word "oikonomikos" which means skilled in household management. The modern day use of the word refers to the skill in using the country's scarce resources or factors of production to satisfy the desires of its peoples.

Why should we be worried about resource usage?

The simple fact of the matter is that there insufficient resources available to keep everyone happy. We live in a world where we are never happy with what we have and consume, and constantly want more and more, ie our demands are infinite. However, the resources needed to produce all these goods and services are limited, ie supply is finite. This then leads onto the economic problem: how do economies use their scarce resources to satisfy and improve the well being of their inhabitants, and how do they make choices between different uses of resources.

Using resources at a local and national level

The economic problem can be examined at a microeconomic level, ie at an individual, local or market level. For example we can look at the influences on the output of firms in the car industry - the goods market (ie amount of labour and raw materials they use), and how many hours will someone in the car factory work - the labour market (time is a resource). What we are looking at here is how good are these markets at allocating or using these scarce resources efficiently. Typical microeconomic questions would include:

We can also study economics at a macroeconomic level where we examine the overall performance of the economy in using resources efficiently. Here we look at indicators like economic growth, inflation, unemployment and international trading relations. Typical questions include:

The nature of economics then is to suggest ways in which resources can be used as effectively as possible whether it be at a local, national or international level, so that our desires are satisfied.

Why is the study of economics so controversial?

One of the reasons for this is that economics is a social science. It tries to build up theories or models of economic behaviour to explain why things have happened and predict what  will happen in the future. For example, what will happen to consumer spending  if the government raised income tax rates. Quite often these models do not give the right results because human behaviour is so unpredictable and also because there are so many influences at work at the same time in the economy that it becomes difficult at times to isolate and identify the relationships between different economic variables.

The second reason as to why economics is so controversial is that there are different schools of economic thought on the operation of the economy to achieve a best use of economic resources. These views will be reflected in attitudes towards the degree of government involvement in the running of the economy  and the different economic polices used by governments to achieve their aims. For example, the followers of Adam Smith would argue that governments should have a minimal role in the economy, allowing the private sector to generate wealth, whilst the followers of John Maynard Keynes would argue that government involvement in the running of the economy was important to correct the failings of the private sector.

Positive and Normative economics

Positive economics is concerned with statements of fact, ie statements that can proved to true or false, eg unemployment has fallen in the last six months. These statements do not present any real difficulty. Where the controversy enters is with normative economics. these are statements of opinion, what should and should not be, what is good and bad in the economy. For example taxes should rise to pay for extra spending on the health service, the government ought to pay pensioners more and that a free market economy is the best way of generating a good allocation of economic resources. These are judgments made by individuals and are open to debate, ie they cannot be proved to true or false, but can be argued about by appealing to people's own subjective viewpoint on how the economy best works. 

It is this normative aspect which makes economics so controversial and yet do exciting.

The aim of this course is to introduce you to the different microeconomic and macroeconomic debates so that you can make your own mind up about how best to run the economy to alleviate the problems associated with scarce resources. This will allow you to debate with others and also put your views down effectively on paper in the exams which will mean that you have made good use of your scarce time.

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