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NATURE AND NATURE AND METHODS OF METHODS OF ECONOMICSECONOMICS
AUSAF AHMADAUSAF AHMAD
Presentation on November 21Presentation on November 21stst 2007 2007At At
Aligarh College of Engineering and ManagementAligarh College of Engineering and ManagementAligarh U.P. Aligarh U.P.
Dominance of Economic Dominance of Economic IssuesIssues
Dominance of economic issues Dominance of economic issues in social discussions.in social discussions.
Economics has become the Economics has become the intellectual religion of the day. intellectual religion of the day.
Lack of economic literacyLack of economic literacyEconomic education Economic education
CLASSIFICATION OF CLASSIFICATION OF KNOWLEDGEKNOWLEDGE
KNOWLEDGE
DivineKnowlege
Human Knowledge
Arts Sciences
Natural Sciences
Social Sciences
NATURAL SCIENCESNATURAL SCIENCES
NATURAL SCIENCES
MATHEMATICS
ASTRONOMY
PHYSICS
Chemistry
Biology
SOCIAL SCIENCESSOCIAL SCIENCES
SOCIALSCIENCE
S
ECONOMICS
SOCILOGY
POLITICS
ANTHROPOLYGY
HISTORY
PSYCHOLOGY
DIFFERENT APPROACHES TO DIFFERENT APPROACHES TO ECONOMICSECONOMICS
Classical approach: Smith, Ricardo, J.B. SayClassical approach: Smith, Ricardo, J.B. Say– Economics is the Science of Wealth.Economics is the Science of Wealth. Critique of Classical Approach: Marx and CarlyleCritique of Classical Approach: Marx and Carlyle ““Dismal Science” and “Bread and Butter Science”Dismal Science” and “Bread and Butter Science”
Neo Classical Approach:Neo Classical Approach:—Economics studies human welfareEconomics studies human welfare
Modern Approach:Modern Approach:—Economics studies how unlimited wants could be Economics studies how unlimited wants could be
fulfilled with limited resources. It is a science of fulfilled with limited resources. It is a science of choice. choice.
Economic goods and Free Economic goods and Free goodsgoods
Distinction between Distinction between economic goods and Free economic goods and Free goods. goods.
Scarcity as a fact of Scarcity as a fact of economic lifeeconomic life
There is nothing like a There is nothing like a Free lunch.Free lunch.
Economy and Economic Economy and Economic organizationorganization
Meaning of EconomyMeaning of Economy An economy is a organization of An economy is a organization of
human beings through which they human beings through which they carry out certain basic economic carry out certain basic economic activities such as production, activities such as production, exchange, distribution and exchange, distribution and consumption to fulfil their needs. consumption to fulfil their needs.
Basic Functions of an EconomyBasic Functions of an Economy
BASIC FUNCTIONS OF AN BASIC FUNCTIONS OF AN ECONOMYECONOMY
WHAT TO PRODUCE? [issue of WHAT TO PRODUCE? [issue of Allocation of Resources ]Allocation of Resources ]
HOW TO PRODUCE [ issue of choice HOW TO PRODUCE [ issue of choice of techniques ]of techniques ]
FOR WHOM TO PRODUCE [ issue of FOR WHOM TO PRODUCE [ issue of Distribution of the produce Distribution of the produce
PRODUCTION POSSIBILITY PRODUCTION POSSIBILITY CURVECURVE
Substitution between Guns and Butter
Guns in thousands
Butter in thousand kg
Y1
Y2
Y3
YC
XC
x1 x2 x3
DIFFERENT VIEWS OF DIFFERENT VIEWS OF ECONOMYECONOMY
CONSUMPTION UNITSCONSUMPTION UNITS
households
Economy
Individuals
DIFFERENT VIEWS OF DIFFERENT VIEWS OF ECONOMYECONOMY
PRODUCTION UNITSPRODUCTION UNITS
Economy
Sectors
f
industries
Sectors
Firms
DIFFERENT VIEWS OF DIFFERENT VIEWS OF ECONOMYECONOMY
EXCHANGE UNITSEXCHANGE UNITS
Economy
Markets
METHODS OF ECONOMIC METHODS OF ECONOMIC INQUIRYINQUIRY
Theoretical MethodsTheoretical Methods Empirical MethodsEmpirical Methods Both Methods are used in EconomicsBoth Methods are used in Economics No method is superior or inferior to No method is superior or inferior to
other. other. Each method has its own limitation.Each method has its own limitation. To judge an economic data (result, To judge an economic data (result,
principle or theory) one must consider principle or theory) one must consider how it has been arrived at. how it has been arrived at.
THEORETICAL AND EMPIRICAL THEORETICAL AND EMPIRICAL METHODSMETHODS
Real World
Conclusions Conclusions about the about the Real World. Real World.
Experimental Design
Experiment
Result of Experiment
Logical Model
Logical Reasoning
Logical Conclusion
Theoretical
Abstraction
Experimental Abstraction
Statistical
Interpretation Theoretical Interpretati
on
Deductive and Inductive Deductive and Inductive logiclogic
Deductive logic. Deductive logic. – Major and Minor PremisesMajor and Minor Premises– Conclusion is correct if major premise is Conclusion is correct if major premise is
correct. For example:correct. For example:
All human beings are mortal.All human beings are mortal.
John is a human being.John is a human being.
John is mortal. John is mortal.
Necessarily TrueNecessarily True
Deductive and Inductive Deductive and Inductive logiclogic
Incorrect Premises lead to incorrect Incorrect Premises lead to incorrect conclusions:conclusions:
All Men are StupidAll Men are Stupid
John is a manJohn is a man
John is stupid.John is stupid.
Not necessarily trueNot necessarily true
Deductive and Inductive Deductive and Inductive logiclogic
Inductive Logic:Inductive Logic:John is stupidJohn is stupid
Tom is stupidTom is stupid
Jack is stupidJack is stupid
John, Tom and jack are humansJohn, Tom and jack are humans
Therefore, all humans are stupid.Therefore, all humans are stupid.
Not Necessarily TrueNot Necessarily TrueBased on the Law of Uniformity of Based on the Law of Uniformity of
Nature, which is itself unproved. Nature, which is itself unproved.
MICRO AND MACRO MICRO AND MACRO ECONOMICSECONOMICS
Micro economics is the study of Micro economics is the study of functioning of one unit of the functioning of one unit of the economy i.e. an individual, a economy i.e. an individual, a household, a market etc. household, a market etc.
Macro economics is the study of Macro economics is the study of functioning of full economy, different functioning of full economy, different units interacting with each other.units interacting with each other.
It is not correct to say that one is It is not correct to say that one is more important or more correct than more important or more correct than the other. the other.
SOME CRITIQUE OF MODERN SOME CRITIQUE OF MODERN ECONOMICSECONOMICS
Modern Economics is not value neutral as claimed Modern Economics is not value neutral as claimed by positivist. by positivist.
One may not accept value premises of modern One may not accept value premises of modern economics. For example, family is unit of analysis economics. For example, family is unit of analysis in developing countries while individual is center in developing countries while individual is center of analysis in modern economicsof analysis in modern economics
Modern economics assumes and treats man as Modern economics assumes and treats man as homo-economicus, motivated only by self homo-economicus, motivated only by self interest. interest.
The economy is perceived to be driven only by The economy is perceived to be driven only by Profit motive. There may be other motives of Profit motive. There may be other motives of economic behavior. economic behavior.
Modern economy gives more weight to efficiency Modern economy gives more weight to efficiency in comparison to equity and justice. in comparison to equity and justice.
EPILOGUEEPILOGUE
THANK YOUTHANK YOU
FORFOR
YOUR TIME AND YOUR TIME AND CONSIDERATION.CONSIDERATION.
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