CHAPTER 1: NATURE, SCOE AND METHODOLOGY OF ECONOMICS

THE ORIGIN OF ECONOMICS

o GREEK WORD → OIKONOMIA → HOUSEHOLD MANAGEMENT
o RECOGNIZED ONLY IN 1776 → “AN INQUIRY INTO THE NATURE AND CAUSES OF THE
WEALTH OF NATIONS” BY ADAM SMITH → BECAME THE BIBLE OF ECONOMICS FOR
CENTURIES
o ADAM SMITH → FATHER OF MODERN ECONOMICS
FOUR SIGNIFICANT CONCEPTS IN THE DEFINITION OF ECONOMICS
o A. SCIENCE
 SYSTEMATIZED BODY OF KNOWLEDGE THAT FOLLOWS A SCIENTIFIC APPROACH
IN DEALING WITH ECONOMIC ISSUES
 STEP BY STEP PROCESS
 1. KNOW AND UNDERSTAND THE PROBLEM
 2. FORMULATE THE HYPOTHESIS
 3. GATHER REAL-WORD DATA OR FACTS THAT ARE RELEVANT TO THE
PROBLEM
 4. BASED ON THE GATHERED FACTS, OBSERVE, ANALYZE AND MAKE
INTERPRETATIONS
 5. MAKE GENERALIZATION AND RECOMMENDATIONS AS TO WHETHER
TO ACCEPT, REJECT OR MODIFY THE HYPOTHESIS
o B. SOCIAL SCIENCE
 STUDY OF HUMAN BEHAVIOR
 HOW SOCIETY AND INDIVIDUALS GENERALLY MAKE CHOICES
 OPPORTUNITY COST → ALTERNATICE ACTION THAT SHOULD HAVE BEEN
UNDERTAKEN INSTEAD
o C. CONCEPT OF SCARCITY
 FUNDAMENTAL PROBLLEM IN ANY SOCIRTY
 LIMITS OUR OPTIONS TO CHOOSE
 “THERE IS NO SUCH THING AS A FREE LUNCH” → CORE PHILOSOPHY IN
ECONOMICS
o D. INSATIABLE HUMAN WANTS
MACROECONOMICS VS MICROECONOMICS
o MACROECONOMICS
 STUDY OF THE AFFREGATE ECONOMY OR THE ECONOMY OF THE COUTRY AS A
WHOLE
 PERFORMANCE OF THE FOUR SECTORS IN THE ECONOMY
 1. HOUSEHOLD
 2. BUSINESS
 3. GOVERNMENT
 4. FOREIGN SECTORS
 o MICROECONOMICS
 STUDY OF THE BEHAVIOR OF INDIVIDUAL CONSUMER AND FIRM OR INDUSTRY
IN THE ECONOMY
 SPECIFIC UNITS OF THE COUNTRY
 FACTORS THAT INFLUENCE INDIVIDUAL ECONOMIC CHOICES
 HOW THE CHOICES OF VARIOUS DECISION MAKERS ARE COORDINATED BY
MARKETS
ECONOMIC METHODOLOGY
o DESCRIPTIVE ECONOMICS
 COMPILING OR GATHERING DATA RELEVANT TO A PARTICULAR PROBLEM
 MAY COME FROM:
 PRIMARY DATA → ONE’S PRESENT PURPOSED USING DIRECT
OBSERVATION, SURVEYS AND INTERVIEWS
 SECONDARY DATA → COLLECTED FROM STATISTICAL AGENCIES
o THEORETICAL ECONOMICS
 PROCESS OF DERIVING THEORIES AND PRINCIPLE
o ECONOMIC THEORY
 FACTS ARE STUDIED, ARRANGED AND GENERALIZAED
 GENERALIZATION BASED ON VARIETY OF FACTS ABOUT WHY OR HOW AN
ECONOMIC EVENT OCCURS
 USEFUL BECAUSE THEY EXPLAIN CERTAIN ECONOMIC BEHAVIOR OR DECISIONS
o ECONOMIC POLICY
 ECONOMIC THEORY OR PRINCIPAL WHICH IS PUT INTO ACTION
POSITIVE AND NORMATIVE ECONOMICS
o POSITIVE ECONOMICS
 DESCRIBE HOW THE ECONOMY AND ECONOMIC POLICIES WORK WITHOUT
RESORTING TO VALUE JUDGEMENTS (STATISTICAL DATAS)
o NORMATIVE ECONOMICS
 USE OF VALUE JUDGEMENTS TO ASSESS THE PERFORMANCE OF THE ECONOMY
AND ECONOMIC POLICIES
INDUCTIVE VS. DEDUCTIVE METHOD
o INDUCTIVE METHOD
 EMPIRICAL METHOD
 RESEARCHES ARE CONDUCTED FROM FACTS TO THEORY OF FROM SPECIFIC
OBSERVATIONS TO MAKE GENERALIZAED EXPLANATIONS, ECONOMIC
GENERALIZATIONS ABOUT THE OBSERVED PHENOMENON
o DEDUCTIVE METHOD
 GENERAL BEHAVIOR TO PARTICULAR BEHAVIOR OR FROM THEORY TO FACTS