Economics Guide, Meaning , Facts, Information and Description
Economics is the social science studying the production, distribution and consumption of goods and services. It describes them in terms of the tradeoffs between competing alternatives as observed through measurable quantities such as input, price and output.Economists study human behavior and welfare as a relationship between scarce means (which have other uses) and socially required ends. (Lionel Robbins, 1935) The field comprises a number of (potentially irreconcilable) theories about systems of production and distribution. Aspects receiving particular attention in economics are resource allocation, production, distribution, trade, and competition.
Market, Guatemala.]]Understanding choices by individuals and groups is central. With scarcity, choosing one alternative implies forgoing another alternative (the opportunity cost). For instance, learning one skill implies time not spent learning another. In a market setting, the currently dominant theory is that scarcity is quantified by price relationships.
Economists believe that incentives and desires play an important role in shaping decision making. Concepts from the Utilitarian school of philosophy are used as analytical concepts within economics, though economists appreciate that society may not adopt utilitarian objectives. One example of this is the idea of a utility function, which is assumed to be the means by which individual economic actors decide what makes them "happy" and what decisions they make in pursuit of that happiness.
Economics is said to be positive when it attempts to explain the consequences of different choices given a set of assumptions and normative when it prescribes a certain route of action. Since failures of economic systems have lead to famines, depressions, wars and revolutions, economics has been referred to as "the dismal science", and its study is filled with both utopian aspirations, and polemical condemnations. In the end, the study of economics attempts to root disputes in matters of measurable facts, rather than ideology or bias.
Economics is usually divided into two main branches:
Areas of study in economics
Attempts to join these two branches or to refute the distinction between them have been important motivators in much of recent economic thought, especially in the late 1970s and early 1980s. Today, the consensus view is arguably that good macroeconomics has solid microeconomic foundations; i.e. its premises have theoretical and evidential support in microeconomics.
Economics can also be divided into numerous subdisciplines that do not always fit neatly into the macro/micro categorization. Some of these subdisciplines include: international economics, labour economics, welfare economics, resource economics, environmental economics, managerial economics, financial economics, urban economics, and spatial economics.
There are also methodologies used by economists whose underlying theories are important.
- The most significant example may be econometrics, which applies statistical techniques to the study of economic data. Computational economics relies on mathematical methods, including econometrics.
- Another trend which is more recent, and closer to microeconomics, is to use social psychology concepts (behavioral economics) and methods (experimental economics)
There has been an increasing trend for ideas and methods from economics to be applied in wider contexts. Since economics analysis focuses on decision making, it can be applied (with varying degrees of success) to any field where people are faced with alternatives – education, marriage, health, etc. Public Choice Theory studies how economic analysis can apply to those fields traditionally considered outside of economics. The areas of investigation in Economics therefore overlap with other social sciences, including political science and sociology. See political economy for the study of economics in the context of political science. The most prevalent political economy is loosely called capitalism.
In microeconomic theory supply and demand attempts to describe, explain, and predict the price and quantity of goods sold in competitive markets. It is one of the most fundamental economic models, ubiquitously used as a basic building block in a wide range of more detailed economic models and theories.
In general the theory claims that where goods are traded in a market at a price where consumers demand more goods than firms are prepared to supply, this shortage will tend to increase the price of the goods. Those consumers that are prepared to pay more will bid up the market price. Conversely prices will tend to fall when the quantity supplied exceeds the quantity demanded. This price/quantity adjustment mechanism causes the market to approach an equilibrium point, a point at which there is no longer any impetus to change. This theoretical point of stability is defined as the point where producers are prepared to sell exactly the same quantity of goods as the consumers want to buy.
The theory of supply and demand is important in the functioning of a market economy in that it explains the mechanism by which many resource allocation decisions are made.
In order to measure the ebb and flow of supply and demand, a measurable value is needed. The oldest and most commonly used is Price, or the going rate of exchange between buyers and sellers in a market. Price theory, therefore, charts the movement of measurable quantities over time, and the relationship between price and other measurable variables. In Adam Smith's Wealth of Nations this was the trade-off between price and convenience. A great deal of economic theory is based around prices and the theory of supply and demand. In economic theory, the most efficient form of communication is when changes to an economy occur through price, where too much supply leads to lower prices, and too much demand leads to higher prices.
Another area of economic controversy is on whether price measures value correctly. In mainstream market economics, where there are significant scarcities not factored into price, there is said to be an externalization of cost. Market economics predicts that scarce goods which are under-priced are over-consumed (See social cost). This leads into public goods theory.
Because scarcity and decision are central to economic theory, the question of what is the basic trade-off in economics is of central importance. In every economic theory, there is a basic exchange of two or more ultimately scarce commodities. For Adam Smith, it was defined as the trading of time, or convenience, for money. For example, a person could live near town, and pay more for rent or his domicile, or live farther away and pay less, "paying the difference out of his convenience".
In economic theory, the price level is determined by the marginal cost and marginal utility. The price of all goods will be the cost of making the last one that people will purchase, the price of all the employees in a firm will be the cost of hiring the last one the firm needs. Marginalism looks at decisions based on "the margins", what the cost to produce the next unit is, versus how much it is expected to return in profit. When the marginal return of an action reaches zero, the action stops. Marginal utility is how much more happiness or use an individual gets out of a purchase versus purchasing less. Marginal rewards are often subject to diminishing returns, getting less reward out of more production or consumption - the 10th candy bar doesn't taste as good as the first, and so brings less marginal utility.
Marginalism became increasingly important in economic theory in the late 19th century, and is a tool which is used to analyze how economic systems will react. Marginal cost of production divides costs into "fixed" costs which must be paid regardless of how many of a commodity are produced, and "variable costs". The marginal cost is the variable cost of the last unit, plus the percentage of fixed costs. Marginalism states that when the profit from the next unit will be zero, that unit will not be produced.
It could be argued that beneath an economic theory is a theory of value. Value can be defined as the underlying activity which economics describes and measures. It is what is "really" happening.
"Market theory" argues that there is no "value" separate from price, that the market incorporates all available information into price, and that so long as markets are open, that price and value are one and the same. This theory rests on the idea of the "rational economic actor". This was originally asserted by Mill.
Another set of theories rest on the idea that there is a basic external scarcity, and that "value" represents the relationship to that basic scarcity. Theories based on economics being limited by energy or based on a "gold standard" are of this type.
All of these value theories are used in current economic work.
Economics relies on rigorous styles of argument more than other social sciences. This is at least the purported ideal of professionals in the field. Economic methodology has several interacting parts;
Formal modelling has been adopted to some extent by all branches of economics. It is not identical to what is often referred to as mathematical economics; this includes, but is not limited to, an attempt to set microeconomics, in particular general equilibrium on solid mathematical foundations. Some reject mathematical economics: the Austrian School of economics believes that anything beyond simple logic is often unnecessary and inappropriate for economic analysis. In fact, the entire empirical-deductive framework sketched in this section may be rejected outright by this school. However, we believe the framework sketched here represents accurately the current predominant view of economics.
Main article: History of economic thought.
The term economics was coined around 1870 and popularized by influential "neoclassical" economists such as Alfred Marshall, as a substitute for the earlier term political economy, which referred to "the economy of polities" – competing states. The term political economy has been used through the 18-19th centuries, with Adam Smith, David Ricardo and Karl Marx as its main thinkers and which today is frequently referred to as the "classical" economic theory. Both economy and economics are derived from the Greek oikos- for "house" or "settlement", and nomos for "laws" or "norms".
Economic thought may be roughly divided into three phases: Premodern (Greek, Roman, Arab), Early modern (mercantilist, physiocrats) and Modern (since Adam Smith in the late 18th century). Systematic economic theory has been developed mainly since the birth of the modern era.
There is some degree of tension between economics and theories of ethics, historically a branch of philosophy, which emphasizes how we ought to conduct ourselves and balances of rights and duties. Modern economics deals with this tension explicitly – according to some thinkers a theory of economics is also, or implies also, a theory of moral reasoning. One way economists deal with this is to qualify discussions of economic choice by noting that "all else being equal..." referring to moral or social factors that are supposedly held equivalent for all choices that one might make. For exploration of this issue, see the moral purchasing article.
Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources – for instance, when fueling a fire one is usually concerned with finding the wood, and not so much with finding the air to burn it with. Economics explicitly does not deal with free abundant inputs – one criticism is that it often conflicts with ecology's view of what affects what. Human beings are, according to ecologists, merely one species participating in a vast energy system on this planet – economy is a subset of ecology that deals with just one species' habits and wants. See nature's services for the economic view of ecology and green economics for the view wherein economics is a subset of ecology.
A third premise is that economics suggests market forms and other means of distribution of scarce goods that do not just affect "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is involuntary, certainly given the conditioning that people have to expect certain quality of life. This leads to one of the most hotly debated areas in economic policy: namely the effect and efficacy of welfare policies. This is viewed as a failure to respect economic reasoning by libertarians, who argue that redistribution of wealth is morally and economically wrong. And viewed as a failure of economics to respect society by socialists, who argue that disparities of wealth should not have been allowed in the first place. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory.
The older term for economics, political economy, is still often used instead of economics, especially by radical economists such as Marxists who strongly question assumptions of "mainstream" technical and quantitative economics. Use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings political considerations into economic analysis and therefore tends to be more normative. Some mainstream universities (such as the University of Toronto and many in the United Kingdom) have a political economy department rather than an economics department.
Information theory has been applied to economics since the work of Ronald Coase in the 1930's. However, with Herbert Simon and John von Neumann in the 1950's, it gathered a more specific formalism as part of game theory. This emphasises that the decision-making process itself is costly
Marxist economics generally denies the trade-off of time for money. In the Marxist view, concentrated control over the means of production is the basis for the allocation of resources among classes. Scarcity of any particular physical resource is subsidiary to the central question of power relationships embedded in the means of production.
The question of the environment is viewed, in the traditional economic framework, as being related to the externalization of costs. That is, market economics assumes that a good which is underpriced, is overconsumed. Externalization of cost, in this view, will be corrected by pricing the overconsumed resources which are being used, for example the work of Lester Thurow and also see Pigovian taxes. Not all economics study accepts this paradigm, and, instead, there is a seven decade old tradition of viewing economic relationships as being based on the scarcity of energy, rather than price, as the central feature of economics.
This is an Article on Economics. Page Contains Information, Facts Details or Explanation Guide About Economics Economic assumptions
Supply and Demand
model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).]]
Main article: Supply and demand.Price
are determined by the relative supply and demand of different currencies — an important issue in international trade. ]]
In many practical economic models, some form of "price stickiness" is incorporated to model the observed fact that in many markets prices do not move fluidly. Economic policy often revolves around arguments as to what is causing "economic friction", or price stickiness, and which is, therefore, preventing the supply and demand from reaching equilibrium.Scarcity
on the floor of the New York Stock Exchange always involve a face-to-face interaction. There is one podium/desk on the trading floor for each of the exchange's three thousand or so stocks.]]
This view, that the primary trade-off involved in economics is between time and money, has several challengers. Each of these bases its view of scarcity on a different fundamental trade-off. A small number of economists prefer to define economics as the study of how and why people trade; this definition implies relative scarcity. Marginalism
Value
like this 1922 US $100 gold note could be exchanged by the bearer for its face value in gold.]]
Adam Smith defined "labor" as the underlying source of value, and "the labor theory of value" underlies the work of Karl Marx, David Ricardo and many other "classical" economists. The "labor theory of value" argues that a good or service is worth the labor that it takes to produce. For most, this value determines a commodity's price. This labor theory of price and the closely related cost-of-production theory of value dominates the work of most classical economists, but they are far from the only accepted basis for "value". For example neoclassical economists and Austrian School economists prefer the marginal theory of value.Economic language and reasoning
Formal modelling is motivated by general principles of consistency and completeness.Development of economic thought
Economics and other disciplines
See also
Microeconomics
Macroeconomics
Methodology
Related fields
Critics
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