What is economics?
Definition of Economics
- Economics is a social science that studies how individuals, businesses, governments, and societies make decisions about how to allocate their limited resources.
- Central to economics is the concept of scarcity - the idea that society's wants will always exceed the capability to fulfil these wants, necessitating choices to be made.
- This leads onto the concept of opportunity cost, which is the benefit forgone of the next best alternative when a choice is made.
Branches of Economics
- Economics can be split into two main branches: Microeconomics and Macroeconomics.
- Microeconomics focuses on individual units within the economy such as households and firms. It is concerned with issues like consumer behaviour, or the decisions businesses make about production.
- Macroeconomics, on the other hand, looks at the economy as a whole. It studies nationwide phenomena like inflation, economic growth, and unemployment.
Basic Economic Problem
- The basic economic problem arises from scarcity and involves three fundamental questions: what to produce, how to produce, and for whom to produce.
- The answers to these questions depend on an economy’s economic system. The three main types are a market economy, a command economy, and a mixed economy.
Economic Models and Theories
- Economists illustrate their theories and principles through economic models.
- These models are simplifications of complex real-world situations and are used to predict economic outcomes.
- One commonly used model in microeconomics is the demand and supply model which demonstrates the interaction between buyers and sellers in a market.
Economic Indicators
- Economists use various indicators to measure the performance and health of an economy. These include Gross Domestic Product (GDP), inflation rates, unemployment rates, and productivity measures.
- Each of these indicators provides important data about different aspects of an economy's performance.
Role of Economic Policy
- Economics also involves studying and evaluating government policies. These include monetary policy (handling a country's money supply and interest rates) and fiscal policy (managing government revenue and expenses).
- Economics seeks to advise on the effective design and implementation of these policies to optimise social welfare.
Given the breadth and complexity of economics, it's important to understand these fundamental elements first. As you deepen your understanding of economics, you'll be able to decipher more complex economic issues and policies.