1.2 - How do economists approach the world?

Unit 1 - Introduction to Economics

positive economics

• Positive statements that can be tested accepted, refuted or amended based on evidence

• Logic and reasoning to predict and explain certain events

• Based on hypotheses, empirical evidence

  e.g Healthcare spending by the government will increase by 25%. The government should increase their spending on healthcare.

  An increase in corporate tax rate will lead to a higher unemployment rate.

• explain certain events, make predictions, support/refute claims

normative economics

• Subjective value judgements that forms the basis of economic policy making and what should be done / should work

• Based on opinions and beliefs

  e.g Corporate taxes are too high!

• Used in policy making

Adam Smith, Laissez Faire

• The invisible hand naturally guides decisions

• The invisible hand refers to the idea that individuals, maximising profit in a competitive market, indirectly contribute to the greater good of society by producing goods and services that others demand

• Zero to little govermnent intervention, free market

Classical Microeconomics (utility theory)

• Utility refers to the satisfaction which consumers derive from consuming goods and services.

• Marshall developed the utility theorythat consumers aim to maximize their own satisfaction (assuming they are rational)

Classical macroeconomics

• Supply generates its own demand

• Production of goods = factor income (wages)

• disposable income will be used to purchase goods and services

• any excess supply will eventually be absorbed by the income generated from production

• hence aggregate supply = aggregate demand

  e.g supply of bread increases, increase production, hire more bakers, bakers get more income, bakers spend $ with disposable income, aggregate demand increases

Marxist Critique of Classical Economic Thought

• value of a good is determined by the amount of labor put into producing it (labor theory of value)

• capitalists exploit workers by paying them less than the value of their labor, leading to profits for the capitalist class

• government intervention is needed to protect workers from exploitation of capitalists

Keynesian revolution

• the government must intervene in order to stabilize and lift an economy out of a recession.

Monetarist

• government intervention prevents the free market from achieving full employment.

Behavioural Economics

• Integration of psychology into economics

• Most classical economic theories assume that consumers are entirely rational.

• However, humans do not always behave rationally and are guided by psychological biases.

circular economy

• make, use recycle

linear economy

• take, make, waste