- •1. The Scope and Method of Economics
- •1.1. Scope of Economics
- •1.1.1. Microeconomics
- •1.1.2. Macroeconomics
- •1.2. Analytic Tools and Methods of Economics
- •1.2.1. A Key Assumption: Rational Self-Interest
- •1.2.2. Opportunity Cost
- •1.2.3. Marginal Analysis & Sunk Cost
- •1.2.4. Positive vs. Normative
- •1.2.5. 4 Steps to Reach a Conclusion
- •1.3. From economic Theories to economic Policy
- •1.3.1. The Building of Theories and Models
- •1.3.2. Economic Policy and 4 Criteria for Judging
1.3.2. Economic Policy and 4 Criteria for Judging
Theories and models are positive statements, helping us understand the mechanism of the world, but the formulation of economic policy requires a second step, the step to further these theories and models into practice to get to what we think it should be. What are the objectives? How to define better, that is what changes to our situation are positive? Do we better off or worse off? Four criteria are frequently applied in making these judgments:
Efficiency In economics, efficiency means allocative efficiency. An efficient economy is one that produces what people want and does so at the lowest possible cost. More technically, an efficient change in the allocation of resources is one that at least potentially makes some people better off without making others worse off. Since most changes in an economy will leave some people better off and others worse off, we have to devise a way of comparing gains and losses from a given change. So, a change is considered at least potentially efficient if the value of the resulting gains exceeds that of the resulting losses.
Equity Fairness. Few people agree on what is fair and what is unfair, though. For thousands of years, philosophers wrestle with the principles of justice to guide social decisions. Despite the impossibility of defining equity or fairness universally, public policy makers judge and regulate the fairness of economic outcomes all the time.
Growth Economic growth is an increase in the total output of an economy. That is what happens when we invent new and better ways of producing what we use now and develop new products and services. However, all economic policies do not encourage economic growth, some discourage it.
Stability Economic stability refers to the condition in which national output is steady or growing, with low inflation and full employment of resources. An economy may at times be unstable, characterized by high unemployment and severe inflation. The causes of instability and attempts to stabilize the economy by government regulation are the subject matter of macroeconomics.