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.
