Doing Economics

Peter Smith

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138791664
• eBook ISBN: 9781317648994
• Topic: Business
• Subtopic: Business General
• Index: Business

Doing Economics offers a clear and accessible guide to the nature of Economics. Unlike many other mainstream disciplines, economics is a subject that many students meet for the first time when they arrive at University to study the subject at degree level. The way economics is studied at university level can vary greatly from economics as represented in the media, but this handy beginner's guide bridges that gap.

This book answers such questions as:

• What is economics as a subject?
• What sorts of questions does it address?
• What skills are needed to become a good economist?
• Where will it take me?

Students will be introduced to the key characters who contributed to the development of economics, as well as to the central ideas and concepts. This definitive guide outlines the attributes that make a good economist and presents a wide variety of employment opportunities that can follow the study of economics. Familiarising students with the important terms and issues, it is an essential volume for all students approaching this fascinating subject.

PART I

Defining economics

1

What is economics?

This chapter will:

• outline the subject matter of economics

• set out three key questions that lie at the heart of economic analysis

• introduce the main economic agents taking economic decisions

• identify the way that economists approach decision-making and problem-solving

• note the importance of coordinating resource allocation and the potential for economic policy to influence economic decisions and the performance of an economy

Many students meet economics as a subject for the first time when they arrive to study it at university, sometimes with only a vague idea about what it is.

This is partly because economics is not one of those subjects that forms part of the school curriculum from its early years. Almost from day one, pupils begin to learn the three Rs, reading, writing and ’rithmetic. These then evolve into English literature and language and mathematics. Geography, history and the core sciences follow soon after – but not economics.

Economics as a discipline for study thus waits for the last couple of years of school or college, or for university. By the time you start to study economics, you will already have been taking economic decisions and facing economic problems without knowing that you have been doing so. By studying economics as a discipline, you will find that you become more aware of these decisions and problems, and will be able to tackle these more effectively.

A definition of economics?

Defining economics as a discipline is not as easy as you might expect. Perhaps you think that economics is the ‘study of the economy’, and to some extent that is correct. However, this is too simple, and leaves too many questions unanswered – for a start, this definition would not make sense unless it is absolutely clear what is meant by ‘the economy’.

If you were to undertake a Google search on ‘economics definition’, you would be confronted by a range of possible options. Here are a few examples:

the branch of knowledge concerned with the production, consumption, and transfer of wealth

(The Oxford Dictionary of English as cited by Google)

a science concerned with the process or system by which goods and services are produced, sold, and bought

http://www.merriam-webster.com/dictionary/economics

the study of how people choose to use resources’

The American Economic Association (AEA) at
htt­ps:­//w­ww.­aea­web­.or­g/s­tud­ent­s/W­hat­IsE­con­omi­cs.­php

the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.’

Lionel Robbins (1932, p. 15)

A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants.

Investopedia at
http://www.investopedia.com/terms/e/economics.asp

Notice that many of these definitions focus more on the processes that economists study, rather than setting out the scope, or the subject matter, of the discipline. Many popular books written by economists in recent years (e.g. Levitt and Dubner and Harford) have expanded horizons by showing how economic thinking can be used to answer any number of questions about aspects of life not normally associated with economics. These offer an entertaining introduction to how economists may think – but do not necessarily provide a foretaste of what it will be like to study the subject at university. Indeed, the Korean economist Ha-Joon Chang of the University of Cambridge has noted that there are many economists who tend to ‘define their subject in terms of its theoretical approach, rather than its subject matter’ (Chang, 2014).

Introductory textbooks have also tended to shy away from providing a simple definition of the subject. Indeed, many of them also focus on the ‘central economic problem’ – the problem of coordinating production decisions with consumption. We will explore this more carefully soon.

If you study economics at a UK university, you will find that the programme of study is designed to meet the subject benchmark that is set by the Quality Assurance Agency (QAA), which is the regulator for universities in the UK. In July 2015, the QAA published its latest national subject benchmark for economics, setting out what every undergraduate economics programme in the country is expected to deliver. It therefore makes sense to begin with their statement of what economics is:

Economics is the study of the factors that influence income, wealth and well-being. From this it seeks to inform the design and implementation of economic policy. Its aim is to analyse and understand the allocation, distribution and utilisation of resources and the consequences for economic and social well-being. Economics is concerned with such phenomena in the past and present and how they may evolve in the future.

htt­p:/­/ww­w.q­aa.­ac.­uk/­en/­Pub­lic­ati­ons­/Do­cum­ent­s/
S­BS-­Eco­nomi­cs-1­5.pdf, p. 5

This statement sets out what you can expect from a university education in economics. It was produced by a review group composed of academic economists from a range of UK universities together with employer and student representatives. All economics programmes in the UK are required to fulfil the expectations set out in the benchmark statement – which goes on to provide much more detail about the content of programmes and the skills and attributes of an economics graduate. As this book progresses, it will touch base with this document from time to time to explain how it will influence the education that you will receive.

From the quotation, you can begin to appreciate the scope of economic analysis. It is not just about ‘money’ or the economic indicators that receive attention in the media, such as unemployment or inflation. Economics is about well-being, it is about inequality and it is about the design of economic policy to influence economic aspects of the society in which we live. It is about how society has developed in the past, how it is performing in the present, and how it is likely to develop in the future.

Three questions

The teaching of economics in universities in the period after the Second World War was strongly influenced by Paul Samuelson’s Economics textbook published in 1948. The nineteenth edition (produced in conjunction with William Nordhaus) was published in 2009, and the book has influenced generations of economists. Samuelson argued that economics was about three key questions affecting society: what is produced, how it is produced and for whom it is produced.

What is produced?

The resources available to a society are used to produce goods and services. A key question to be analysed is how decisions are taken on what combination of goods and services should be produced to add to the well-being of members of society. For example, how does a society decide how resources should be allocated between goods and services for consumption in the present, as opposed to using resources now that will deliver more goods and services in the future?

How are goods and services produced?

Decisions are also needed concerning how goods and services are produced, given that there are different ways in which this can be accomplished. For example, there may be alternative ways of manufacturing goods making use of workers or automated processes.

For whom are goods and services produced?

The question here is who gets to consume the goods and services that are produced. In other words, how are resources distributed amongst the members of society?

These questions offer what is perhaps a more focused view of the scope of economic analysis than some of the more simple definitions listed earlier, although the questions can be related back to those attempts at defining economics. Let’s look at some of the fundamental economic issues that underpin the study of these three questions and introduce some concepts and ideas that you will no doubt encounter early in any study of the discipline.

Economic agents

The definition of economics offered by Investopedia above refers to choices made by ‘individuals, governments, firms and nations’. These are the key economic agents whose decisions are analysed by economists. It is helpful at this point to say a little about each of them.

Individuals (households)

Households or individuals make two important kinds of economic decisions. As consumers, they take decisions about which goods and services to buy, and in what quantities. Consumer theory is an important part of economic analysis that explores how these decisions are taken. However, people also provide labour, and thus contribute to the production of goods and services, in return earning income that can then be used to buy goods and services.

Governments (nations)

It should be clear that governments also take important economic decisions. Governments impose taxes and undertake expenditure, spending on goods and services and ensuring that the economy works effectively. Governments take those decisions on behalf of the population; in a democratic society, elections provide the mandate for government to take decisions and implement economic policy.

The extent to which governments intervene in the operation of society varies between countries, and the way in which resources are allocated differs – for example, resources are allocated very differently in a democracy such as the UK or the USA than in socialist countries like North Korea or China. This will be explored later in the book.

Firms

Firms are responsible for organising the production of goods and services, and play a crucial role in the economy. As part of this process, they hire labour from households and take important decisions about current and future production.

Scarcity and choice

Early in the chapter, it was claimed that by the time you begin to study economics, you will already have been taking economic decisions and facing economic problems. Let’s look more closely at this notion.

It’s Saturday morning. You lie in bed for a bit, thinking about how you could spend your day. You could hang out with your friends in the shopping mall or ice cream parlour, or see a new film showing at the cinema. Your local football team has a home match. Or you could spend time making cupcakes because you enjoy baking. You have homework to be done. After some deliberation and a further doze, you text your friends and arrange to meet up in the shopping mall later on.

Why is this an economic decision?

First and foremost, it is because you cannot do everything. There are only so many hours in the day, so you must make a choice. In short, you face a situation of scarcity. In this case, the scarcity is forced because of limited time, but it may also reflect your other resources. Perhaps you don’t have enough cash to pay for a ticket for the football, or to buy the ingredients to make cupcakes.

For the society as a whole, scarcity is similarly an issue. A society cannot provide all the goods and services that all of its members would like. The underlying issue is that people have unlimited wants, but society faces scarce resources relative to those unlimited wants. The definitions of economics quoted earlier from Robbins and Investopedia both make explicit reference to scarcity as part of their statements.

Scarcity forces choices to be made, and leads to one of the most fundamental of economic concepts.

Opportunity cost

As soon as you choose to take a particular action, you exclude the possibility of some alternative. If you choose to meet up with your friends in the shopping mall, you also choose not to do your homework or make cupcakes. This is the cost of your choice, known by economists as the opportunity cost. In other words, the opportunity cost is the value of the next best alternative...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• About the author
• Acknowledgements
• Introduction
• Part I Defining economics
• Part II The scope of economics
• Part III Studying economics
• Part IV Using economics
• Useful questions to ask at an open (visit) day
• Glossary of key terms and concepts
• Additional resources
• Index