Economics

Key unit competence: By the end of the unit, you should be able to describe the nature and scope of Economics as applied in various domains.

3.1. NATURE OF ECONOMICS

Activity 3.1
(a) In groups of five, debate why you would call History an arts subject and Biology a science subject.
(b) Using the knowledge derived from the debate in (i) above, discuss why Economics is an arts and a science subject.
(c) Make a presentation to the whole class after the discussion.

In this unit, we are concerned with the question: ‘Is Economics an arts subject or a science subject?’ We shall look at the methodologies used by economists to arrive at their conclusions so as to answer this question. The unit is also concerned with the substance of Economics.

Scholars such as Lionel Robbins, J. B. Says and J. S. Mill, in their definitions of Economics, look at Economics as a science.

J S Mill defines Economics as ‘a practical science of production and distribution of wealth and problems involved in production and distribution.’
Lionel Robbins defines Economics as ‘a science that studies human behaviour as ends and scarce means which have alternative uses.’

J B Say talks of Economics as ‘a science of production, distribution and consumption of wealth.’

From the above, we can conclude that Economics is a social science subject. It falls in the same category as Psychology, Political Science and Sociology.
As a social science (arts), Economics studies human beings and the decisions they make to influence the economic environment of the society they live in. It uses scientific inquiry based on observation, and deductions to build models that can explain phenomena.

As a science subject, Economics uses scientific approaches when establishing truths about an economic event. Economics defines concepts and quantifies them for purposes of evaluation and testing.

Hypotheses are developed from the scientific approach used, which stand periods of time to become laws, principles, and theories that explain economic behaviours of individuals, groups, and societies. It uses data into the theories developed to test and predict behavior.

3.2 POSITIVE AND NORMATIVE ECONOMICS

Activity 3.2
In groups of five, read through the following statements:
(a) (i) Workers are paid good salaries.
(ii) HIV/AIDS kills many people in Sub Saharan Africa.
(b) (i) Workers should be paid good salaries.
(ii) Everybody should learn how to save and invest.
What is the difference(s) in the above statements?
Identify the statements that are objective and give what actually happens on the ground.
What can you say about the other statements?

Positive Economics is a branch of Economics that studies variables the way they are, that is, the way they exist in real life. Positive economics is factual and can be verified. It uses objective explanations. For instance, a statement like ‘Prices for agricultural products fluctuate frequently’ is a positive statement.

Normative Economics is a branch of Economics that studies variables the way they ought to be, as a desirable condition. It uses subjective explanations. For instance, a statement like, ‘Prices in the market should be stable,’ is a normative statement.

3.3. ECONOMIC VARIABLES

Activity 3.3
Twahirwa is a commercial Irish potato farmer in Musanze District. His target is to produce high quality potatoes in large quantities.
In groups of five:
(a) Explain how the following will affect his anticipated yields.
   (i) A favourable season.
  (ii) Use of improved seeds and firm tools.
  (iii) The price of Irish potatoes.
  (iv) Government legislation.
(b) On which of the above variables does Twahirwa have control?
(c) Analyse and find out whether a change in the amount of output
produced can have an influence on the four variables.

A variable is a factor that can change. A variable is measurable. Examples of variables include prices of the commodities, government policies and amount of output produced.
These variables can either be endogenous (dependent) or exogenous (independent).

Endogenous factors originate from within the system. Exogenous factors originate from outside the system. Changes in the exogenous factors affect the endogenous factors. Changes in the endogenous factors may not influence the exogenous factors. The amount of Irish potatoes produced (in the above activity) is an endogenous variable. It is influenced by seasonal changes. Factors that originate within the economy and affect it but can be controlled are endogenous.

Exogenous factors are not affected by changes in the endogenous factors. For instance in the above activity, change in season is an exogenous variable. It is not influenced by change in output. Factors that originate from outside the economy and are beyond the economy’s control are exogenous.

3.4. BRANCHES OF ECONOMICS

Activity 3.4
In groups of five:
(a) List the different parts of the body.
(b) Brainstorm and explain how each part functions independently.
(c) Discuss how all parts of the body work together to make the body function.
(d) Relate the discussion to Economics and its branches: microeconomics and macroeconomics.

Microeconomics is a branch of Economics that studies individual units of the economy. Such units may be households, firms or prices of commodities, among others. It looks at how these single units function individually. It looks at areas such as household decisions on consumption, the firm’s production and profit maximisation decisions, market prices and their regulations.

Macroeconomics is a branch of Economics that studies all units of the economy as an aggregate. It looks at the economy as a single functioning unit. This is because the different individual units of the economy are interrelated. It looks at areas like the causes of economic growth, changes in interest rates and their effects on the economy, effects of monetary and fiscal policies.

Activity 3.5

(a) Do you like the view in the picture above?
(b) Name the natural features identified in it.
(c) How important are the features in today’s economic world?
(d) What can be done to protect such features?

Unit Summary

In this unit, the following were discussed:
• Economics as an art subject.
• Economics as a science subject.
• Positive economics.
• Normative economics.
• Economic variables such as endogenious and exogenious factors as variables.
• Branches of economics as mircoeconomics and macroeconomics.

Unit Assessment 3

1. Differentiate between the following:
   (i) Positive economics and normative economics.
  (ii) Endogenous factors and exogenous factors.
  (iii) Microeconomics and macroeconomics.
2. Read through the following and classify each statement as either microeconomics or macroeconomics.
  (i) Study of the functioning of prices in an economy.
  (ii) Rwanda’s economy is growing at a fast rate.
  (iii) Study of employment levels and unemployment levels in the economy.
  (iv) Study of the operation of firms.
  (v) Taxation
  (vi) Every member of labour force in the country should be employed.