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?