What is Economics?

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Economics is a science that deals with the production, exchange, and consumption of various commodities. Here we have shared the basics of economics and its definition and types of economic systems.

What is Economics?

Economics is a branch of study and it’s all about the economy or economic system is the way a nation makes economic choices about how the nation will use its resources to produce and distribute goods and services.

Economics Meaning

  • The term “economics” is derived from the Greek words “oikos,” meaning household or family, and “nomos,” meaning management or regulation.
  • Originally, the study of economics focused on household management and budgeting, but over time it evolved to encompass the broader study of the production, distribution, and consumption of goods and services in society as a whole.

The modern use of the term “economics” dates back to the 18th century, when economists such as Adam Smith and David Ricardo began to develop theories about the workings of markets and the allocation of resources.

Economic studies continued to develop and expand in the centuries that followed, with the emergence of new schools of thought and the application of economic principles to a wide range of social and political issues.

Definition of Economics

Economics is the social science that studies how individuals, businesses, governments, and other organizations make choices about how to allocate scarce resources to satisfy their unlimited wants and needs.

It involves the analysis of the production, distribution, and consumption of goods and services, as well as the behavior of individuals and institutions in response to economic incentives.

Here are the various definitions of Economics given by different Authors.

Who is the father of Economics?

  • Adam Smith is known as the father of Economics. and he has given a definition on the basis of Wealth.

Economics definition (Wealth)

Adam Smith is often seen as the founding father of economic studies. In his book, the “Wealth of Nation” published in the year 1776, he defines economics as “the study of wealth.”

“Economics is the study of the nature and causes of the wealth of nations” – Adam Smith

Economics definition (Welfare)

“Economics is the Study of mankind in the ordinary business of life implies that in everyday life people usually seek material well-being.” – Alfred Marshall

Economics definition (Scarcity)

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” – Lionel Robbins

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” – Professor Lionet Robbins (in an essay on the Nature and Significance of Economics Science 1932)

Economics definition (Growth and Development)

“Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and group of society.” – Paul Samuelson

Scope of Economics

We can understand the scope of economics on the basis of where it is applicable.

  • Microeconomics
  • Macroeconomics
  • International economic study
  • Development economic study
  • Public economic study
  • Environmental Economics
We can also understand the scope of economic study on the basis of its nature.

Nature of Economics

  • Concerns with the economic behavior of human beings living in society.
  • Economic Theories or models are built from observing the behavior of people.
  • Not pure science but social science.
  • Society is the laboratory to test the laws of economics.
  • As a Social Science
  • As an Art

Economics as a Social Science

  • (a) Facts
  • (b) Experiments
  • (c) Cause and Effect relationships
  • (d) Laws
  • (e) Sociality Problems
  • (f) Systematic Study

Economics as an Art

  • (a) Creativity
  • (b) Realistic
  • (c) Verification of laws

Importance of Economics

  • Good Citizenship in the Society
  • Improved decision-making in both areas individually and as a business
  • Economic Growth and development
  • Opportunity Costs
  • Helps in the study of Societal and global affairs
  • Better Resource allocation
  • Maintaining Inflation
  • Effect of externalities
  • facilitates Maximum Utility

Also Read: Determinants of Demand

Normative Vs Positive Economics

Here we have shared the concept of Normative and Positive Economic studies and differences with examples.

1. Normative Economics

It is a body of systemized knowledge relating to the criterion of what ought (should) to be. It provides suggestions. More practical, more useful, more economical, and more realistic approx.

Example of Normative

The football field is better when it is wet. Here are Statements about what should be (value judgments)

A normative Economy is based on the expression of opinions that reflect values and beliefs. It is also known as policy economics.

Statement of Opinion

  • Involve value judgments to articulate “what should be”
  • Cannot be confirmed or refuted solely by reference to facts.
  • Require political decision-making focused on the common good or the collective well-being of society.
  • For example, Government should provide affordable daycare for working parents.

2. Positive Economics

It is concerned with accurate descriptions of phenomena and explains what are, Law it works, and what are their effects. It is logical, efficient, and uniform, and helps in the formulation of theories.

Example of a Positive Economic Study

If it rains the football field will get wet. Here are Statements of fact and logical deductions.

A positive Economy is based on the analysis of factual information. It is also known as an analytical economic study.

  1. Descriptive statements
  2. Conditional Statements

Descriptive Statements

  • Descriptive statements are Factual observations that can be verified or confirmed.
  • For example, Canadian softwood lumber sales to the US are down 20% from last year.

Conditional Statements

  • Conditional Statements are Forecasts based on identified behavior patterns and assumptions regarding whether these patterns will continue or change.
  • It can be continued observation and analysis.
  • For example, If income taxes are reduced consumer spending will increase.

Types of Economics

  • On the basis of Branches
  • On the basis of the Economic System

Branches of Economics

  • Microeconomics
  • Macroeconomics

Microeconomics

  • Microeconomics is a branch of economics that studies the behavior of individual consumers, firms, and industries and how they interact in markets.
  • It analysis the economics of any particular decision-making unit. Such as individuals, Business units, and households.

It focuses on the analysis of the allocation of resources and the decisions made by individual economic agents such as households and firms in making choices regarding the production and consumption of goods and services.

Microeconomics is concerned with the analysis of specific economic phenomena and is often used to inform public policy and business decision-making.

Microeconomy examines how economic agents make decisions, how they respond to changes in prices and incentives, how they interact with each other in markets, and how they allocate scarce resources.

Some of the key concepts studied in microeconomics include supply and demand, market equilibrium, consumer behavior, production and costs, and market structure and competition.

Macroeconomics 

  • Macroeconomics is a branch of economics that studies the behavior and performance of an economy as a whole, rather than focusing on individual markets or firms.
  • It involves analyzing the behavior of the overall economy, including its growth, inflation, unemployment, and international trade.

Macroeconomic concepts and theories are used to study issues such as the causes and effects of business cycles, the role of government in the economy, and the relationship between economic growth and living standards.

Some of the key concepts in macroeconomics include Gross Domestic Product (GDP), inflation, unemployment, interest rates, fiscal policy, and monetary policy. These concepts are used to measure and analyze the overall health and performance of the economy.

Macroeconomic analysis is important for governments, policymakers, and businesses to make informed decisions about economic policy, investments, and strategic planning.

Also Read: What is International Trade?

Types of Economic Systems

  1. Capitalist
  2. Socialist
  3. Mixed

1. Capitalist Economy (Free Market)

Where government intervention is absent or negligible. It is characterized by private ownership of means of production, individual decision-making, and the use of a market mechanism to carry out the decisions of individual participants and facilitate the flow of goods and services in the market.

Example of Capitalist Economy: USA

2. Socialist Economy

This is the one where instruments of production are owned by the public authority or voluntarily associated and operated not to profit by sales to other people but for the direct service of those whom the authority or association represents.

Example of Socialist Economy: China

3. Mixed Economy

A mixed economy system is one in which the public and the private sectors are allotted their respective roles to promote the economic well fare of all the sections of the community.

Example of Mixed Economy: India

Other Economic System

  • Primitivism economic system
  • Feudalism economic system
  • Communism economic system