Economics

October 16, 2021

Methods of Economics

Positive Economics - An approach to economics that seeks to understand behaviour and the operations of
systems without making judgements. It descrobibes what exists and how it works. What determines the price
in a market? The answer to this question would be the subject of positive economics. 

Normative economics - an approach to economics that analyzes outcomes of economic behaviour, evaluates
them as good or bad, and may prescribe courses of action (policy economics). Should the government
subsidize Tertiary Education? The answer to this question would be the subject of normative economics. 

Economic Theory - A statement or set of related statements about the cause and effect, action and reaction.

Model - A formal statement of a theory, usually a mathematical statement of a presumed relationship

between two or more variables 

Variable - A measure that can change from time to time from observation to observation

Rational Choice -  A rational choice is one that uses the available resources to most effectively satisfy the
wants of the person making the choice. Only the wants and preferences of the person making a choice are
relevant to determine its rationality. 

Types of Economic Systems

Command / Planned Economy

The command economy is usually associated with a socialist or communist economic system, where land and
capital are collectively owned. The state plans the allocation of resources at three important levels. 
 It plans the allocation of resources between current consumption and investment for the future. By
sacrificing some present consumption and diverting resources into investments, it could increase the
economy's growth rate. 

 At a microeconomic level, it plans the output of each industry and firm, the techniques that will be
used and the labour and other resources required by each industry and firm.

 It plans the distribution of output between consumers. This will depend on the government's aims. It
may distribute goods according to its judgement of people's needs; or it may give more to those who
 produce more, thereby providing an incentive for people to work harder. 

In practice, a command economy could achieve these goals only at considerable social and economic cost.
The reasons are as follows:
    
     The larger the more complex the economy, the greater the task of collecting and analysing the
information essential to planning and the more complex the plan. Complicated plans are likely to be
costly to administer and involve cumbersome bureacracy. 

 If there is no system of prices, or if prices are set arbitrarily by the state, planning is likely to involve
the inefficient use of resources.

 It is difficult to devise appropriate incentives to encourage workers and managers to be more

productive without a reduction in quality. 

 Complete state control over resources allocation would involve a considerable loss of individual
liberty. 

Free Market / Capitalist Economic System

In a free market, individuals are free to make their own decisions. Consumers are free to decide what to buy
with their incomes: free to make demand decisions.  Firms are free to choose what to sell and what
production methods to use: free to make supply decisions. The demand and supply decisions of consumers
and firms are transmited to each other through their effect on prices: through the price mechanism. The prices
that results are the prices that firms and consumers have to accept. 

The problems of a free market are as follows:

    
     Competition between firms is often limited. A giant firms may dominate an industry. In these cases
they charge high prices and make large profits. 

 Lack of competition and high profits may remove the incentives for firms to be efficient.

 Power and property may be unequally distributed. Those who have power and /or property (eg. big
buisiness, unions, landlords) will gain at the expense of those without power and property.
  The practicies of some firms may be socially undesirable. For example, a chemical works may pollute
the environment. 

 Some socially desirable goods would simply not be produced by private enterprise. 

 A free market economy may lead to macroeconomic instability. There may be periods or recession
with high unemployment falling output and other periods of rising prices. 

 There is the ethical objection, that a free market economy, by rewarding self-interest behaviour, may
encourage selfishness, greed and materialism and the aquisition of power.

The mixed economic system 

Because of the problems of both free market and command economies, all real-world economies are a
mixture of the two systems.

In mixed market economies the government may control the following: 

     Relative prices of goods and inputs, by taxing or subsidising them or direct price controls.

 Relative incomes, by the use of income taxes, welfare payment or direct controls over wages, profits,
rents etc. 

 The pattern of production and consumption, by the use of legislation ( eg. maaking it legal to produce
unsafe goods) by direct provision of goods and services ( eg. education and defence) by taxes and
subsidies or by nationalism. 

 The macroeconomic problems of unemployment, inflation, lack of growth, balance of trade deficits
and exchange rate fluctuations, by the use of taxes and government expenditure, the control of bank
lending and interest rates, the direct control of prices and the control of foriegn exchange rate. 

links for videos:

    
    https://www.youtube.com/watch?v=7Ybh8AeFO2o  
    
    https://www.youtube.com/watch?v=4V9TZtzEpIw 
    
    https://www.youtube.com/watch?v=hB7VasNUINk  
    
    https://www.youtube.com/watch?v=YtX6SGw7E3c 
    
    
https://www.youtube.com/watch?v=ruDfKL0xPg4  

    
    

Home work

1. List two disadvantages of mixed economic system.

2. What is the traditional economic system.