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The Nature and Method of
Economics
MR. CLARKE.
HOLY CROSS CATHOLIC SECONDARY
FEBRUARY 2012.
The Nature of Economics
 “Want is a growing giant whom the coat of Have was
never large enough to cover.”
- Ralph Waldo Emerson, circa 1860.
The Economic Perspective
 A viewpoint that envisions individuals and
institutions making rational decisions by comparing
the marginal benefits and marginal costs associated
with their actions.
 We have Unlimited Wants... But a limited amount of
resources, how to deal with this is the Economic
Problem.
There is no “Free Lunch”
 Because there are scarce inputs (labour, land, capital
etc.), we must forgo something to gain something
else...
 Opportunity Cost is the sacrifice that we make, or
what we give up in order to gain something else.
 Every decision we make comes with an opportunity
cost.
Rational Behaviour
 Economists must assume that human beings are
rational creatures, that they make self-interested
choices in their ordering of actions.
 People have different preferences and preferences
can change.
 Economists often strive to predict these changes...
but are humans always rational?
Marginal Analysis
 The comparison of marginal benefits and costs.
 Does the extra unit of cost outweigh the extra unit of
benefit in making a purchase or engaging in an
activity?
 The status quo is difficult as marginal decisions are
always being made.
 Why would someone who is a light eater eat more at
a buffet?
The Scientific Method
 The systematic pursuit of knowledge through the
formulation of a problem, collection of data, and the
formulation of hypotheses.
 Economic laws and principles are statements about
economic behaviour that enable prediction of the
probable effects of certain actions.
Hypothesis
Theory
Law /
Principle
 Communism versus the “Law of Demand.”
 Does price change how consumers behave?
Generalizations
 What is a generalization?
 Economic theories and laws are imprecise because
no two individuals or institutions are exactly alike.
 We express our theories and laws as the tendencies
of “typical or average” consumers, workers, or firms.
Ceteris Paribus
 To arrive at an economic theory, we must assume
“other-things being equal.”
 When examining how consumers will react to buying
Coca-Cola when the price of Pepsi increases, we must
assume “other things remain equal.”
 Like in other sciences, we must isolate variables to
test theories.
Applied Economics / Policy Economics
 The application of theories and date to formulate
policies that aim to resolve economic problems or
further goals.
 Reduce poverty, increase spending, reduce
unemployment, raise taxes, generate wealth.
 www.bankofcanada.ca
What are the generally accepted aims of
economic policy?
Economic
Growth
Balance of
Trade
Economic
Security
Full
Employment
Economic
Goals
Economic
Efficiency
Price
Stability
Equitable
Income
Distribution
Economic
Freedom
Tradeoffs
 The sacrifice of some or all of one economic goal,
good, or service to achieve some other goal, good, or
service.
 Economists must assess tradeoffs to ascertain the
best outcome for society.
- Ex. Taxation helps with equitable income
distribution but may reduce economic efficiency and
economic freedom.
Macroeconomics
 The branch of economics concerned with the
economy as a whole, or aggregates.
 Aggregates are a collection of specific economic units
treated as if they were one unit.
 Macro-economists aim to obtain an overview of the
structure of the economy. Ex. Total output (GDP),
total employment, inflation levels (CPI).
Microeconomics
 The branch of economics concerned with such
individual units as industries, firms, and households.
 Measure the price of a single product (Gold
Watches), or the number of employees required at a
single firm (Rolex).
 Macro deals with the beach as a whole, Micro deals
with the sand, rocks, etc.
Key Question
 Page 17 # 7
Microeconomics or Macroeconomics?
Positive and Normative Economics
 Positive: The analysis of facts or data to establish
scientific generalizations about economic behaviour.
 Positive economics focuses on facts and cause and
effect relationships. It does not involve value
judgements.
 It deals with what the economy is actually like.
“Factual analysis.”
 Normative economics is the part of economics
involving value judgements about what the economy
SHOULD be like.
 Positive economics concerns what is, while
normative embodies subjective feelings about what
ought to be.
 Ex. Substantial tuition increases reduce enrolment
(positive). Tuition should be subsidized to promote
education (normative).
Pitfalls to Objective Economics
Biases
Loaded Terminology
Definitions
Fallacy of Composition
Causation Fallacies
Bias and Loaded Terminology
 Most people already possess inherent bias with
regards to money and economic issues. This effects
their economic judgements.
 Economic writing often contains loaded
terminology because writers often represent
personal interests or groups.
 Ex. Suncor’s profits could be labelled “obscene,”
“healthy,” “fat,” “stellar.”
Definitions and Fallacy of Composition
 Economic definitions are often particular and must
be understood in context. “Investment,” for instance,
refers to buying real physical capital and assets, not
stocks. www.tse.com
 Fallacy of Composition is incorrectly reasoning
that what is true for the individual or part is
necessarily true for the group or whole. Ex. A farmer
who has a great crop sees his personal income
increase, but incomes for farmers as a whole will not.
Causation Fallacies
 Post-Hoc Fallacy: Incorrectly reasoning that when
one event precedes another the first event must have
caused the second event.
- Christopher Columbus and the Solar Eclipse.
 Correlation versus Causation: Correlation
between two events only indicates that the two are
associated, not necessarily that one CAUSED the
other. Ex. Education and income?
Chapter Questions.
 Page 17 # 9
 Page 17# 12
 Internet Application Question # 1: Simply go to
www.statscan.gc.ca and search for the inflation, real
GDP, and unemployment rates to answer the
question.