1.Discuss the nature of economics.

The nature of economics

Economics is the scientific study of the ownership, use, and exchange of scarce resources – often
shortened to the science of scarcity. Economics is regarded as a social science because it uses scientific
methods to build theories that can help explain the behaviour of individuals, groups and organisations.
Economics attempts to explain economic behaviour, which arises when scarce resources are exchanged.

In terms of methodology, economists, like other social scientists, are not able to undertake controlled
experiments in the way that chemists and biologists are. Hence, economists have to employ different
methods, based primarily on observation and deduction and the construction of abstract models.

As the social sciences have evolved over the last 100 years, they have become increasingly specialised.
This is true for economics, as witnessed by the development of many different strands of investigation
including micro and macro economics, pure and applied economics, and industrial and financial
economics. What links them all is the attempt to understand how and why exchange takes place, and
how exchange creates benefits and costs for the participants.

2. What are the methods and limitations of economics?

*Describe and measure the exchanges they observe

Economists describe changes in economic variables, and measure these changes over time. For example,
economists describe and measure how interaction in markets determines the prices of such diverse
products as motor cars, houses, haircuts, and computer software. Measurement in economics can take
many forms, including measuring absolute and relative quantities and values. When measuring relative
values it is common to use index numbers.

*Explain how interactions arise and create costs and benefits

Economists try to explain the effects, or results, of economic transactions. For example, economists can
explain why, despite bubbles and crashes, the long-run trend in house prices in the UK has been
upwards over the last 30 years, and can identify those who have been affected positively and negatively
by this increase. Of course, economists also try to explain the short-term movements in prices, and how
they also have costs and benefits.

*Propose hypotheses, construct, and apply ‘models’ to test these hypotheses.

Like all scientists, economists develop hypotheses to explain why economic behaviour takes place, and
then construct models to test these hypotheses. For example, economists may propose that price rises
are caused by excess demand, and then attempt to construct a model of price that explains how excess
demand can raise price. Economists frequently use versions of the demand and supply model to help
explain events such as house price trends and movements. Economic models usually employ graphical
and mathematical analysis to help explain and illustrate such economic processes.

Gather data to put into the model

Models must be tested against the real world, which means gathering statistical data about real events.
In this way, a model can be improved and revised when necessary.

*Predict behaviour based on these models.

The ultimate goal of the economist is to predict future behaviour. For example, by using a demand and
supply model and by inputting real data about the housing market, economists can show that even a
small fall in bank lending can trigger behaviour that leads to a significant fall in house prices in the short
run. The ultimate value of an economic model is that it can accurately predict the onset and the effect of
an economic event. The better the model is, the more useful it is in helping economists make
predictions.

The limitations of economics become especially problematic in normative economics, which involves
recommendations about how things ought to be and what types of policies a government should
implement in order to improve a nation’s economy. Different economists come to completely different
conclusions about what kind of regulations and controls should be applied to various markets and
exactly what outcomes will result. While they can point to data, historical precedence, and other facts to
support their arguments, there is no way to guarantee that they are right.Because the field of economics
cannot provide concrete conclusions, it is susceptible to criticism from a variety of sources, as is the case
with political economics. Politicians often use normative economics to argue for certain policy changes
that support their own agendas. They present their beliefs and hypotheses to the public as irrefutable
facts when, in actuality, there is no way to verify the validity of their ideas, except to put them into
practice and evaluate the results.

3.Enumerate the economic system models?

 Traditional Economic System

The traditional economic system is the most traditional and ancient types of economies in the world.
Vast portions of the world still function under a traditional economic system. These areas tend to be
rural, second- or third-world, and closely tied to the land, usually through farming. In general, in a
traditional economic system, a surplus would be rare. Each member of a traditional economy has a more
specific and pronounced role, and these societies tend to be very close-knit and socially satisfied.
However, they do lack access to technology and advanced medicine.

 Command Economic System

In a command economic system, a large part of the economic system is controlled by a centralized
power. For example, in the USSR most decisions were made by the central government. This type of
economy was the core of the communist philosophy.

Since the government is such a central feature of the economy, it is often involved in everything from
planning to redistributing resources. A command economy is capable of creating a healthy supply of its
resources, and it rewards its people with affordable prices. This capability also means that the
government usually owns all the critical industries like utilities, aviation, and railroad.

 Market Economic System

In a free-market economy, firms and households act in self-interest to determine how resources get
allocated, what goods get produced and who buys the goods. This is opposite to how a command
economy works, where the central government gets to keep the profits.

There is no government intervention in a pure market economy (“laissez-faire“). However, no truly free
market economy exists in the world. For example, while America is a capitalist nation, our government
still regulates (or attempts to control) fair trade, government programs, honest business, monopolies,
etc. In this type of economy, there is a separation between the government and the market. This
separation prevents the government from becoming too powerful and keeps their interests aligned with
that of the markets.

 Mixed Economic System

A mixed economy is a combination of different types of economic systems. This economic system is a
cross between a market economy and command economy. In the most common types of mixed
economies, the market is more or less free of government ownership except for a few key areas like
transportation or sensitive industries like defense and railroad. However, the government is also usually
involved in the regulation of private businesses. The idea behind a mixed economy was to use the best
of both worlds – incorporate policies that are socialist and capitalist.

To a certain extent, most countries have a mixed economic system. For example, India and France are
mixed economies.
4.What are the criteria for judging the performance of various economic systems?

Economic indicators measure macro-economic variables that directly or indirectly enable economists to
judge whether economic performance has improved or deteriorated. Tracking these indicators is
especially valuable to policy makers, both in terms of assessing whether to intervene and whether the
intervention has worked or not.

Useful indicators include:

Levels of real national income, spending, and output. National income, output, and spending are three
key variables that indicate whether an economy is growing, or in recession. Like many other indicators,
income, output, and spending can also be measured in per capita (per head) terms.

*Growth in real national income.

*Investment levels and the relationship between capital investment and national output.

*Levels of savings and savings ratios.

*Price levels and inflation.

*Competitiveness of exports.

*Levels and types of unemployment.

*Employment levels and patterns of employment.

*The productivity of labour, which influences other economic variables, including an economy’s
competitiveness in international markets.

*Trade deficits and surpluses with specific countries or the rest of the world.

*Debt levels with other countries.

*The proportion of debt to national income.

*The terms of trade of a country.

*The purchasing power of a country’s currency.

*Wider measures of human development, including literacy rates and health care provision. Such
measures are included in the Human Development Index (HDI).

*Measures of human poverty, including the Human Poverty Index (HPI).

5.Unlike botany and mathematics, why is economics not an exact science?

*Economics is not a science is that a lot of it is not based on evidence. If you study economics you will
spend a great deal of time studying perfect competition, a state of affairs that almost nowhere exists.
Utility is another concept which plays a huge part in economics that is so vague and undefined that it is
hard to know if it exists or how you can possibly maximise it. Rational actors, efficient markets, supply
and demand are all concepts that are assumed without evidence to be true. In fact, textbooks are
surprisingly evidence free and embarrassingly divorced from reality.

Economics lacks a crucial element of the scientific method, the ability to repeatedly test hypothesises.
There simply is no neutral control in the real world to test theories and policies against. For example, it
would be great if we could test how best to respond to a recession by having one country implement a
Keynesian stimulus and another conservative austerity and compare the results. However, that simply
isn’t possible as the variables would be enormous (the different economy size, structure, culture and a
thousand other differences even between neighbours). Crucially, it is almost impossible to repeatedly
test a hypothesis.