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Topic 1: Subject and methods of the economic theory – 1 hour

Lecture 1

Lecture outline:

1. Subject of economic theory. Three basic problems of daily living
2. Economic theory and other disciplines. The functions of economic theory
3. Economic theory as a base of economic policy.
4. Positive and normative economics
5. Microeconomics and macroeconomics
6. Opportunity cost (SRS)

People’s vital activity is various. It includes upbringing, education, medical service, rest, science, culture, production. All this spheres of vital activity are closely connected and form united social system, which contains three subsystems: social-cultural, political-administrative, and economic. Each of these systems is mostly independent and has its own laws of functioning. The most important among these systems is economic, because it provides all the people’s vital activity and satisfies their primary (money) needs and spiritual one.

Necessity of satisfaction of different needs induce people to economic activity, production of money profits and services. Exchanging with results of their labor, economic activity subjects (individuals, collectives) enter into special economic relations, which are an object of learning economic science, and, specifically, economic theory.

The word “economics” is known to everyone from an early age. But our primary notion of economics mostly empirical, experienced, which forms under the influence of, the mass media, in which it is said about the prices, income, salary, satisfaction need for goods, service that we seem as economics. Actually notion "economics" is polyhedral. It includes the economics) as economic system, economic science and economic theory.

The term "economics" was introduced into inversion by an ancient Greek philosopher Xenophon, who wrote first disquisition (трактат)of economics. Translating from the Greek "economic" means a science of housekeeping. With development of the exchange, the forming national markets arises necessity in a wide interpretation of the notion "economics" and in 1615 French scientist A. Monkretien introduces in inversion the term "political economy" that in translation from Greek means "art of state management of economy". It was founded on a principle of diligent management, which was developed by experienced way, as a result of generalizations economic practice.

With developing of people’s general knowledge the economic science developing too as science of knowing the laws of economics management. It studies the secrets of the behavior "thinking full-grown matter» - a behavior of individual, companies, branches, society i.e. behavior of the producer and consumer in a process of economic activity, purpose of which is a satisfaction of varied people’s needs.

The Economic science includes:
- A branch economic sciences (the economic industry, transport, agriculture, construction and others);
- functional (the finances, credit, accounting, аудит, statistics, marketing and others);
- interindustry (the economic geography, demography, management and others).

The methodological base of all economic sciences is economic theory as system of scientific explanations to economic people’s activity. It studies the causal relationship and regularity of the economic development processes, economic relations appearing between subjects in the process of their economic activity, enables to forecast the development of the country economics.

The Functions of economic theory are:
- cognitive - reveals itself in studying of the economic laws, the methods of economic activity, without which is impossible all other types of vital activity;
- methodological - is the science of development of the methods, ways scientific instrument, required for investigations all economic sciences;
- practical - is a direct ensuring of economic policy, production management on macro- and мmicroeconomic levels;
- world outlook function - is a forming scientific economic way of thinking.

Necessity to satisfy needs spurs people to labor activity, money-commodity and services production. The main problem, which appears herewith in any economic system, is that the society’s money needs are almost boundless, but facilities, required for their satisfaction, are limited. This boundless money needs is connected with the total progressive directivity of the development human society. While learning powers of the nature as needs grow and multiply themselves, so and possibilities of their satisfaction. It is expressed in a firm dependency, reflecting expansion needs circle and their qualitative improvement, which’s got the title the law of the need’s raising.

For satisfaction of needs, economic resources are required - natural, human, productive. All of these are limited not only from the point of view that some resources to be absolutely exhausted, but also its quantitative availability at presents. The Shortage of resources limits the output of final products. So society constantly faces the necessity of the decision the triad of the economic problems: what, how either as how much to produce, how to distribute the manufactured product to satisfy greatly needs. The decision of these problems is the task of the economic theory.

Consequently, subject of economic theory - is a study of the economic laws and economic relations, acting in a process of public production and motivation of the choice managing subjects the ways of the optimum limited resources usage for the reason of satisfactions increasing individual’ and society’s needs.

In an economic theory analysis is realized on two levels: micro- and macro economic. Microeconomics studies the mechanism of organization economy conduct by the separate economic subject (the enterprises, companies, businessmen), investigates intercepting the consumers and companies in a market system: interaction of the supply and demand, problems of the pricing, market’s conjuncture and factors, defining it and etc. The aim of the microeconomic analysis - is detailed study behavior of the individual economic units to reveal the separate specific components of the economic system.

Macroeconomics studies the economic state of the country’s economy as a whole i.e. economic relationship between economics branches and spheres: processes of social reproduction, usage of the national income, taxes, profit, investment, salaries and the price, inflation and unemployment, and etc.

By the expression of the Swedish economist K. Eklunda, macroeconomics - is our own condition state, our life situation. We should note cramp intercepting, inter conditionality of micro- and macroeconomic processes. So, activity of the separate company is defined mostly by fiscal policy of the state Together with that social policy state and, consequently, good condition of the people’s welfare straight or obliquely depends on Efficiency Company’s activity.

Operation people's economy emerges as a process of production, as a result of which the money profits appears. Society production consists of two interconnected spheres - a material (money) and non-material production.

The Economic theory - is a base of economic policy since the last is based on objective acting economic laws, takes into account the different interests a society, expects different variants of decisions appearing economic problems and choice of the optimum variant of their decision.

The policy in a narrow sense - is a state practical activity.

The economic policy finds the expression in purposes, ways, directions, methods, economics lever of the development, which are defined by authority’s subjects.

Economic policy which takes place in our country expects the decision of two problems:
- a choice of main aims in public economy development;
- a choice of the facilities and ways required for realization put aims.

The economic policy aims are: economic growing, economic and social efficiency. The main ways of the achievement this aims are: resource efficient accommodation, income distribution, stable conditions of the development.

The economic policy can influence on economic progress at three directions: promote its development; restrain the economic development and, consequently, social progress; render the inconsistent influence on economic progress i.e. accelerate one directions of its development and restrain others.

Ignoring of economic theory in policy brings about subjectivism, taking the ungrounded decisions that finally turn into irrational use of economic resources, occurring disproportions in social production.

The development of economic strategy have to be based, on the one hand, on all-round account of the requirements of the objective economic laws, on realistic, objective estimation of the economics condition, revealing of their defects and reasons, but from another hand other – it have to be based on the same realistic estimation of the available possibilities and economic resources for the further social-economic development of the country.

The economic policy directions varied according to contents and political value. There are stood out the following main trends: according to the sphere of the economic life (industry, agriculture, construction, transport, relationship, trade); according to the length of the action (long-, fair-, short-term); according to the political and social-economic value.

The priority development of one or another sphere of the economics is possible at condition of two processes interaction: ensuring the leading material and technical base in this sphere and material, moral stimulation of its development.

The necessity condition to realization of strategic integer - is a choice of the methods and instruments of economic policy. Essence of management methods is defined by production relations, that, in so far they correspond to the nature and level of the development of productive power and are improved together with them. If this improvement is realized through the interests and on the base of interests, then it is necessary to use the economic methods of management - a system of economic and non-economic instruments, directed to integration of all subject’s economic activity interests. Transition to economic methods of the management possible only when state functions of economics management will change. The state must solve only macroeconomic problems, to be busy with the realization of national interests. The economic policy must take into account all managing subject’s interests, put the real aims, choose the directions and priorities of the economic development, using identical ways, methods and instruments of realization.

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