Economics

A social science

Introduction

Economics is the study of scarcity and how it affects the use of resources, the production of goods and services, the growth of production and well-being over time, and many other important and complicated issues that affect society.

It is a multifaceted discipline that studies how individuals, businesses, and societies allocate scarce resources to fulfil unlimited wants and needs. It encompasses a broad range of topics, from supply and demand dynamics to fiscal and monetary policies, international trade, and economic development. Understanding economics is crucial for making informed decisions, shaping policies, and navigating the complexities of the global economy.

History of Economics

Throughout history, many philosophers and religious thinkers have dealt with economic questions. In ancient Greece, for instance, the philosophers Plato and Aristotle addressed the issue of whether private property was a legitimate concept. Likewise, in the thirteenth century, the Italian Christian philosopher Thomas Aquinas discussed the moral aspects of buying and selling goods and services. For much of history, religions such as Christianity and Islam opposed, on moral grounds, such economic trends as the charging of interest (fees paid to those who lend money). But the study of economics did not become systematic until after the Middle Ages.

In the sixteenth through eighteenth centuries, the nation-states of Europe (such as England, France, Spain, and Portugal) wanted to build up power partly by amassing wealth. Out of this desire grew economic theories that dictated the development of capitalism during that time. These theories, later grouped together under the label of mercantilism, generally held that a nation’s wealth was equivalent to its store of gold, silver, and other precious metals. This belief led nations to pursue wealth by maintaining an imbalance in foreign trade. If a nation sold more goods abroad than it imported, then that nation would bring in more gold than it would send outside of its borders through trade. In this way, the developing European nations competed with each other by trying to stockpile gold.

In the eighteenth century, Adam Smith (1723–90) conceived of his book An Inquiry into the Nature and Causes of the Wealth of Nations as a rebuttal to the mercantilist viewpoint, but it was much more than that. Smith argued that a nation’s wealth should be measured not just by its horde of gold but also by all of the goods and services that it produces. He also examined the nature of that enormously sophisticated production of goods and services. One of his guiding insights was the notion of the “invisible hand.” This was the concept that, in a situation where buyers and sellers compete freely in the marketplace for what is in their own self-interest, the greatest good for all is consistently achieved, as if by the prodding of an invisible hand. The marketplace, in Smith’s view, was a self-regulating system in which market prices were determined by the forces of supply (what the sellers want) and demand (what the buyers want).

This, together with Smith’s many other crucial insights into the ways that societies use their resources, served as the foundation for much of the economic thought of the nineteenth century. Even in the twentieth and twenty-first centuries, economists continued to refine and reconsider Smith’s ideas in new ways.

What Is the Role of an Economist?

An economist studies the relationship between a society’s resources and its production or output, and their opinions help shape economic policies related to interest rates, tax laws, employment programs, international trade agreements, and corporate strategies.

Economists analyze economic indicators, such as gross domestic product and the consumer price index to identify potential trends or make economic forecasts.

According to the Bureau of Labor Statistics, 36% of all economists in the United States work for a federal or state agency. Economists are also employed as professors, by corporations, or as part of economic think tanks.

Type of Economics

In general, economics can be broken into two parts: macroeconomics, which looks at how the economy works, and microeconomics, which looks at how people and businesses work.

Microeconomics:

Microeconomics focuses on the behaviour of individual economic agents, such as households, firms, and markets. It analyzes how consumers make choices based on their preferences and budget constraints, and how firms determine output levels and pricing strategies. Microeconomic concepts like supply and demand, elasticity, and market structures provide insights into market efficiency, competition, and resource allocation.

Macroeconomics:

Macroeconomics examines the broader aspects of the economy as a whole. It studies aggregate variables like national income, unemployment, inflation, and economic growth. Macroeconomists explore the interactions between different sectors, such as consumption, investment, government spending, and international trade. Monetary and fiscal policies play a vital role in macroeconomic management and stabilization.

A Few Other Topics

International Economics:

In an increasingly interconnected world, understanding international economics is essential. This branch of economics analyzes trade flows, exchange rates, and the impact of globalization on economies. It explores the benefits and costs of international trade, investigates trade policies, and examines the challenges posed by economic integration and protectionism. International economics also investigates the implications of global economic imbalances and the role of institutions like the World Trade Organization.

Economic Development:

Economic development focuses on strategies and policies to improve the standard of living in developing countries. It examines the factors that contribute to economic growth, such as investments in human capital, infrastructure, and technological advancements. Development economics also investigates issues related to poverty, income inequality, sustainable development, and the role of institutions in promoting inclusive growth.

Behavioral Economics:

Behavioural economics combines insights from psychology and economics to understand how individuals make decisions. It recognizes that people’s choices are often influenced by cognitive biases, social norms, and emotions. Behavioural economics challenges the traditional assumption of rationality in economic models and provides a more realistic understanding of human behaviour. It has important implications for policymaking, marketing, and understanding market failures.

Economic Indicators:

Economic indicators show how a country’s economy is doing in a specific area. When government agencies or private groups put out these reports regularly, they usually have a big effect on the stock, fixed-income, and foreign exchange markets. They can also help investors figure out how the economy will affect markets and make decisions about investments.

Gross Domestic Product (GDP):

Many people think that a country’s gross domestic product (GDP) is the best way to measure how well its economy is doing. It is the total market value of all finished goods and services made in a country during a certain year or other time period. The Bureau of Economic Analysis (BEA) releases a monthly report at the end of each month. Many investors, analysts, and traders pay attention to the advance GDP report and the preliminary report, which come out a few months before the annual GDP report.

Retail sales:

The Department of Commerce (DOC) puts out a report on retail sales in the middle of each month. This report measures the total amount of money made or the dollar value of all products sold in stores.
Using sample data from stores across the country, the report figures out how many products were sold, which is a good indicator of how much money people are spending.

Industrial manufacturing:

The Federal Reserve puts out a report every month called “Industrial Production” that shows how the production of U.S. factories, mines, and utilities has changed over time. One of the closely watched variables in this study is the capacity utilisation ratio, which shows how much of the economy’s productive capacity is being used instead of sitting idle. A country should see its production values increase and its capacity is used to its fullest.

Employment Data:

The Bureau of Labor Statistics (BLS) reports “nonfarm payrolls” every first Friday of the month with information about jobs.
Most of the time, a strong economy means that jobs are being added quickly. In the same way, big drops could mean that contractions are coming. Even though these are broad trends, it is important to look at how the economy is doing.

Changes in prices for consumers (CPI):

The Consumer Price Index (CPI), which the BLS also puts out, is the standard way to measure inflation. It shows how much retail prices (consumer costs) have changed. The CPI compares price changes from month to month and from year to year by putting goods and services from the economy into a basket.

Economic Systems

Primitivism:

In primitive agrarian societies, individuals produced necessities by building dwellings, growing crops, and hunting game at the household or tribal level.

Feudalism:

A political and economic system of Europe from the 9th to 15th century, feudalism was defined by the lords who held land and leased it to peasants for production, who received a promise of safety and security from the lord.

Capitalism:

With the advent of the industrial revolution, capitalism emerged and is defined as a system of production where business owners organize resources including tools, workers, and raw materials to produce goods for market consumption and earn profits. Supply and demand set prices in markets in a way that can serve the best interests of society.

Socialism:

Socialism is a form of a cooperative production economy. Economic socialism is a system of production where there is limited or hybrid private ownership of the means of production. Prices, profits, and losses are not the determining factors used to establish who engages in the production, what to produce and how to produce it.

Communism:

Communism holds that all economic activity is centralized through the coordination of state-sponsored central planners with common ownership of production and distribution.

Supply and Demand

In the previous section, supply and demand were introduced and explored separately. In what follows, the interaction of supply and demand will be presented. The market mechanism is a useful and powerful analytical tool. The market model can be used to explain and forecast movements in prices and quantities of goods and services. The market impacts of current events, government programs and policies, and technological changes can all be evaluated and understood using supply and demand analysis. Markets are the foundation of all economics!

A market equilibrium can be found at the intersection of supply and demand curves, as illustrated for the wheat market in Figure 1.6. An equilibrium is defined as, “a point from which there is no tendency to change.” Wheat is traded in units of metric tons (MT), or 1000 kilograms, equal to approximately 2,204.6 pounds.

Conclusion:

Economics is a dynamic and ever-evolving field that provides valuable insights into how societies allocate resources, make decisions, and address economic challenges. Whether at the micro or macro level, understanding economic principles equips individuals, businesses, and policymakers with the tools to navigate an increasingly complex global economy. By studying economics, we can gain a deeper understanding of the forces that shape our world and work towards creating more prosperous and sustainable societies.