Principles of Economics/What Is Economics
Economics is a social science that studies how people satisfy unlimited wants with scarce resources. It involves the analysis of choice and trade through the use of intuitive graphs and mathematical elements. The discipline is divided into two sections: microeconomics (micro) and macroeconomics (macro).
Micro and Macro
Microeconomics studies small-scale economies. That is, from the individual level on up to the industry level. Microeconomics is concerned with how consumers (buyers) and producers (sellers) come together to exchange goods and services, how much is produced, what to produce, and the going prices. It focuses on the actions of individuals and firms, like the dynamics between buyers and sellers, borrowers and lenders.
Macroeconomics is the branch that studies large-scale economies. Macroeconomics observes and analyzes how entire countries, full of many industries and consumers, function. It is not simply the sum of many "microeconomics"; many of the concepts are entirely different. Where micro will study a single consumer, a paper-clip manufacturing plant or the airline industry, macro studies the entire economy within which those three exist. Some of the elements of a large economy that macroeconomics considers include inflation, government policies, output growth, and unemployment.
Economics involves several recurring themes:
- Trade - buying and selling goods and services
- Models - simplistic situations to understand complex ones
- Utility - a measure of people's happiness
- Choices - choosing the best allocation of resources
- Efficiency - maximizing production and profits
- Scarcity - the premise that people only have so much to work with
- Costs - "there is no such thing as a free lunch"
- Money - who has money, access to it, how it is used, etc.
- Consumption - the buyers in the market who form the demand
- Production - the sellers in the market who form the supply
- Rationality - people doing things with good and logical reasoning
The field of economics is a social science. This means that economics has two important attributes:
- Economics studies human activities and constructions, and
- Economics uses the scientific method and empirical evidence to build its base of knowledge.
Economics is a semi-concrete social science. We must study human behavior and the choices we make. The assumption that people are rational indicates that the discipline focuses heavily on thinking of what would ideally happen in models. Additionally, we have concrete data—numbers—to work with. Formally, economics is the scientific study of the way in which humans make choices about production, consumption and wealth when faced with scarce resources.
The fact that economics is in several ways an abstract science means that various economists have differing interpretations of models and the way the world works. Furthermore, it is difficult to run experiments on social situations, especially on a scale as large as an entire nation. Therefore, economists rely on extensive mathematical tools, like econometrics, to analyze real world situations that have occurred and use that to forecast future situations.