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Economics as Social Science
Economic Methodology
Lecture 2Dominika Milczarek-
Andrzejewska
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Outline of Lecture 2
• Economics as Social Science• Economic Methodology• Macroeconomics and Microeconomics• Positive and Normative Economics• Key Terms
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Economics as Social Science
• Sciences:- Social Science- Natural Science- Formal Science
• Social Sciences:- Economics- Sociology- Law- Political Science- Social Psychology- Anthropology- Education- Geography- Etc.
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Economics and Other Sciences
• Other social sciences:- Use of empirical
research and methodology (sociology or psychology);
- Economic sociology, economic psychology; law & economics, public choice theory
• Other Sciences:- Importance of
mathematics: mathematical models, econometrics, statistics
- Natural sciences: methodological inspiration (e.g. theory of evolution, equilibrium, adaptation, etc.)
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Nature and Method of Economics
Personal decision-making: • list the economic choices you had to
make last week • analyze one or two of these choices in
terms of the alternatives you gave up – What other choices did you have? – What criteria were used to judge the
alternatives? – How rational our decisions were?
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Economic MethodologyEconomics:• Mainly an academic subject• Problems and decisions from the social
point of view
Scientific Method:• Formulation of hypothesis based on
observations– explanations of cause and effect
relationships based upon the facts• Hypothesis testing: acceptance, rejection or
modification of the hypothesis
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Economic MethodologyScientific Method (cont.):• Theory
– theoretical economics: the systematic arranging of facts, interpretation of the facts, making generalizations
• Law or Principle – widely accepted theory– explain and/or predict the behavior of
individuals and institutions– generalizations about economic behavior (used
synonymously)• Models – simplified representations
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Models in Economics• Importance of models or simplification
– Example: a road map– the amount of detail would be determined by the
needs of the „traveler”, i.e., • “I need to travel between Warsaw and Poznan as
quickly as possible,”• “I would like to visit some historical museums as I am
traveling through Italy”
– Neither road map would have the details of the real world.
– Several models of the same problem– Descriptive models, graphical models,
mathematical models
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Economic Methodology• Generalizations
– typical or average individuals, etc.
• Other-Things-Equal Assumptionceteris paribus– to judge the effect one variable has upon
another it is necessary to hold other contributing factors constant
– economics is not a laboratory science › economic principles less precise
– the real world as the laboratory
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Economic Methodology
Abstractions• to find the important connections and
relationships of economic behavior
Graphical Expression
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Economic Methodology
Theories
Facts
Policy Economics
Theoretical Economics
McConnell and Brue 2005
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Economic Policy
POLICY ECONOMICSEconomic theories are the foundation
of economic policy
ECONOMIC POLICY• Steps in policy making:
– State the goal– Determine the policy options– Implement and evaluate the policy that
was selected
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Economic Goals
• Economic Growth• Full Employment• Economic Efficiency• Price-Level Stability• Economic Freedom• Equitable Distribution• Economic Security• Balance of Trade
TRADEOFFS
COMPLEMNTARIES
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Macroeconomics and Microeconomics
MACROECONOMICSExamines the economy as a whole or its
basic aggregates (government, household, business sectors)
AGGREGATE Collection of specific economic units treated as a unit
MICROECONOMICSLooks at specific economic units“Sand, Rocks, and Shells, not the Beach”
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Positive and Normative Economics
Positive Economics– Absolute Facts and Cause-and-Effect
Relationships– Description, Theory Development and
Theory Testing
Normative Economics– Value Judgments– What Ought to Be– What particular policy actions should be
recommended
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Positive and Normative Economics
• Positive:- Analyzing an
influence of taxation on consumers’ and producers’ decisions;
- „Laffer curve”: relationship between tax rates and tax revenues
• Normative: - Use of tax system
to decrease income inequality in society;
- „Fair taxation”
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Why do not economists agree?
• Positive and Normative Economics• Different models used to analyze the
same economic processes• Different theoretical approaches and
different research methodologies
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New tendencies in economic methodology
• Broad use of mathematics (especially game theory)
• Development of experimental economics
• Interest in the role of institutions in economy and interdisciplinary approach to economic processes
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Key Terms
• ECONOMIC PERSPECTIVE
• UTILITY• MARGINAL
ANALYSIS• SCIENTIFIC METHOD• THEORETICAL
ECONOMICS• PRINCIPLES• MODELS
• OTHER-THINGS-EQUAL ASSUMPTION
• POLICY ECONOMICS• TRADEOFFS• MACROECONOMICS• AGGREGATE• MICROECONOMICS• POSITIVE
ECONOMICS• NORMATIVE
ECONOMICS
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Questions to Lecture 2
• How economic theories are developed?
• What is a role of economic models? • What is a difference between
microeconomics and macroeconomics?
• What is a difference between positive and normative economics?
• Why do not economists agree?