The nature of economics

Economics is concerned with the way limited resources are distributed/allocated among alternative uses to satisfy unlimited human wants. It helps to understand the nature and organization of society and the operation and behaviour of business firms and other economic decision-making units.

Microeconomics deals with the economic behaviour of individual units (consumers, firms, resource holders): how scarce resources are allocated among alternative uses; the role of prices and markets.

Macroeconomics is concerned with the economy as a whole or the behaviour of economic aggregates – GDP, Employment, Inflation, etc.

The economist collects facts that are relevant to consideration of a specific economic problem – descriptive or empirical economics. Economists also state economic principles – generalizes about the way individuals and institutions actually behaves = economic theory.

Induction – from facts to theory, from the particular to the general.

Deduction starts at the level of theory and proceeds to the verification or rejection of this theory by an appeal to the facts.

Positive economics try objectively to predict and explain economic phenomena. It deals with facts and is devoid of value judgement. Concerned with “WHAT IS”.

Normative economics is where one’s choice is based on subjective value judgement. It deals with “WHAT OUGHT TO BE”.

Example: Unemployment is 12 % of the labour force – positive Unemployment ought to be reduced – normative.

Fallacy of composition – to assume “what is true for the individual or part of a group is necessarily true for the group as a whole”. E.g. at a football game one person decides to stand up to see better.