What is economics?

Economics is the social science that studies the production, distribution, exchange and consumption of goods and services. It examines how individuals, businesses, governments, and other organizations make decisions about how to allocate resources to meet their needs and wants. There are two main branches of economics: microeconomics and macroeconomics. Microeconomics examines how individual actors such as consumers, firms and markets make decisions and interact with one another. Macroeconomics, on the other hand, studies the economy as a whole, including topics such as inflation, gross domestic product (GDP), and unemployment.

Economics tries to understand the forces shaping the economy at all levels, from the global to the individual, and how policies and institutions affect the way the economy functions. It uses quantitative and mathematical tools to model different scenarios and make predictions about the effects of different economic policies. It also study the historical evolution of the economy, which provide a general understanding of how the economy works and how it changes over time.
Economics is a very broad discipline related with other disciplines.
In the last fifty years, the study of economics has expanded to cover a huge variety of topics. What are the main definitions of this increasingly broad discipline? The most important definitions are:
• The discipline that explores the behavior of financial markets, including interest rates and share prices.
• Analyzes the reasons why some people or countries have high incomes while others are poor and suggests ways to raise the incomes of the poor without hurting the economy.
• Examines business cycles (the ups and downs of unemployment and inflation) along with policies to moderate them.
• Study international trade, finance and the effects of globalization
• Analyzes growth in developing countries and proposes ways to stimulate the efficient use of resources.
• Analyzes how government policies can be implemented to achieve important goals such as rapid economic growth, efficient use of resources, full employment, price stability, and a fair distribution of income.
For Samuel Nordhaus, Nobel Prize in Economics, “economics is the study of how societies use scarce resources to produce valuable goods and distribute them among different people”.
Behind this definition are hidden two key ideas of economics: goods are scarce and society must use its resources efficiently. In fact, economics is an important discipline because of scarcity and the desire to be efficient.
Let’s think of a world without scarcity. What would be the consequences of being able to produce infinite quantities of all goods or of fully satisfying human desires? People would not worry about extending their limited income because they would have everything they wanted; companies would not have to worry about labor costs or health care; Governments wouldn’t need to worry about taxes, spending, or pollution because no one else would. Furthermore, since we would all have whatever we wanted, no one would have to worry about the distribution of income among different people or classes of people.
In such a paradise of abundance all goods would be free, like sand in the desert or sea water on the beach. All prices would equal zero and markets would be unnecessary. In fact, economics would no longer be a useful discipline.
However, there is no society that has reached such as unlimited possibilities’ utopia. Our world is one of scarcity filled with economic goods. A scarcity situation is one in which goods are limited relative to wants. An objective observer would have to agree that, even after two centuries of rapid economic growth, production in the United States is simply not high enough to meet the wishes of all its people. If you add up the wants of all of them, you would immediately discover that there are simply not enough goods and services to satisfy even a small fraction of everyone’s consumption wants. The US national output would have to be many times larger for the average citizen to live at the same level as the average doctor or major league baseball player. In addition, outside the United States, especially in Africa, hundreds of millions of people suffer from hunger and material deprivation.
In the face of unlimited wants it is important that an economy make the best use of its limited resources. This approach leads us to the fundamental concept of efficiency. Efficiency refers to the most effective use of a society’s resources to satisfy people’s needs and wants. Comparatively, let us consider an economy in which there are uncontrolled monopolies, or high levels of contamination or state corruption. Such an economy would either produce less than would be possible in the absence of these factors, or it would produce a distorted set of goods that would leave consumers worse off than they would otherwise be (either misallocating resources).
Economic theory states that an economy produces efficiently when the economic well-being of one person cannot be improved without harming another.
The essence of economic theory is to recognize the reality of scarcity and then find a way to organize society in such a way that it achieves the most efficient use of resources. It is there where the economy makes its exclusive contribution.

Bibliography

Economics. Nordhaus, William D.; Samuelson, Paul A.;. McGraw-Hill Publishing Co. 2009 18 th Edition

 

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