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at any given moment of time. Even in static analysis, sometimes we
consider a short period rather than a single point. We assume that some
changes take place during the short period. The method of approach
where we take note of changes in the short period is known as
comparative statics. For example, in comparative statics, we compare
the state of economy at one moment to the state of the economy at
another moment. Marshall’s analysis of supply and demand is a good
example of comparative statics.
In dynamic analysis, we examine the path or process by which the
economy moves from one state of equilibrium to another. Time element
is an important factor is dynamic analysis. Change is the key word in
dynamic analysis. For example, investment during a period may depend
upon the rate of interest in the previous period. The study of the trade
cycle may be given as a good example of dynamic analysis.
Stocks and flows
Stocks and flows are basic concepts in economics. Stocks can be
measured at a given point of time. A flow is a quantity that can be
measured only in terms of a specified period of time. In other words, it
has a time dimension. For example, wealth is a stock and income is a
flow.
Micro economics and macro economics
Economic theory can be broadly divided into micro economics
and macroeconomics. The term micro means small and macro means
large.
In microeconomics, we deal with problems such as the output of a
single firm or industry, price of a single commodity and spending on
goods by a single household.
Macroeconomics studies the economic system as a whole. In it,
we get a complete picture of the working of the economy. It is a study
of the relations between broad economic aggregates such as total
employment, saving and investment. We may also say that macro
economics is the theory of income, employment, prices and money.
That is why macroeconomics is sometimes studied under the title
“Income and Employment Analysis”.
Economics as a science
We no longer ask the question whether economics is a science or
an art. Science is a systematized body of knowledge. Just as physics
and chemistry are sciences, economics is also a science. We observe
facts, conduct experiments and make generalizations in physics and
chemistry after testing the results. The same scientific methods are
followed in economics also. Economics, like all other sciences, studies
the relationship between cause and effect.
Sciences may be broadly divided into physical sciences and social
sciences. Physics and chemistry are examples of physical sciences.
Economics is a social science. It studies about a particular aspect of
human behaviour. And human behaviour is full of complexity. It is not
easy to study it. So economic science is not as precise and exact as the
physical sciences.
But economics has a greater right to be considered as a science
than other social sciences like politics or history because in economics
we make use of money as a measuring rod of utility. It is true that it is
only a rough measure but still it enables us to give concrete shape to the
laws of economics. Sometimes, what we say in economics may not
come true in real life. But this is the case with many other sciences. For
example, we joke about weather forecasts. The weather report in the
newspaper may say that there will be heavy rainfall on a particular day.
But there might not be any rain at all on that particular day. On account
of that, we cannot say that meteorology (the science of weather) is not
a science. Similarly, if some economic laws do not come true, we cannot
say that economics is not a science.
Methods of Economic Analysis
In economics, broadly we make use of two methods.