We’ve all heard this word being used at some point, probably on the radio or on the television. Students all over the world go to school to study this subject. People get paid a lot of money to analyze this topic. So clearly, economics is everywhere around us and it’s a very popular matter, but what the heck is it? What is the study of economics?
Let’s try this. What’s the first thing that comes to mind when I say the word ‘economics’? What do you think it means or what does it deal with?
“The stock market,” you say.
No, not quite.
Economics has existed long before money was ever created.
“Unemployment and inflation? Demand and supply?”
Closer, but not quite.
While all these topics are associated with the field, none of them are the study of economics itself. Econ existed long before there was a stock market, long before there was GDP, long before there was money. Simply put economics deals with one thing and one thing only: resource allocation. Some people like to call it scarcity. They both mean the same thing to us economists. Understanding this will go a long way towards helping you grasp and understand the concepts that are taught here.
“Scarcity? Resource allocation? What does that even mean?” you ponder.
Let’s think about our planet for a second. Earth has a finite number of resources, wouldn’t you agree? At any given time, we have a limited number of trees, a limited amount of oil, a limited amount of land to build on, right? Now let’s think about the people that inhabit this planet. Right now, we have a population of over seven billion people and that number just keeps on growing. Every single person on this planet has things that they want. Some wants are pretty basic and necessary to survival like food, water, and shelter. Going beyond that, some wants are more luxurious and not necessary to survival, but we want them anyway, things like cars, cell phones, and whatever the latest Apple product is. If you think about it, with the exception of people like Mother Teresa, everyone has an unlimited number of wants. We all want nicer things, better standards of living, more happiness, etc. The problem is that we only have a limited number of resources. So how do we take these limited resources to fulfill this unlimited wants?
That is the problem economics tries to solve.
Every equation, theorem, and graph ever created in econ is geared towards answering one question: What is the best way we can take our limited number of resources to match these unlimited wants to make everyone as happy as possible? Concepts like demand and supply, interest rates, and the free market are all just byproducts of us trying to answer this single question.
This economizing problem as we like to call it, shows up in almost everywhere and as such, specialized fields have been developed to study it. Economics reaches far and wide, diving into other fields like health care, environmental study, even psychology. Econ is considered to be an interdisciplinary study and understanding the basics of economics will almost certainly help in the understanding of other fields as well.
That being said, the majority of economics tends to fall under two main levels: macroeconomics and microeconomics, i.e. the study of the big and the small.
Macroeconomics deals with the big picture. It looks at groups as a whole and tries to learn things about them. For example, inflation deals with the change in price levels across many goods and services. GDP measures the value of production across an entire country. International trade looks at how two or more nations interact with each other to exchange their goods and services.
Microeconomics on the other hand concerns itself with the small picture. It’s the study of individual units or very small portions of the economy. So when we’re talking about microeconomics, we’re generally talking about one person, one company, or one section of the market. This is where we analyze prices for specific product or take a look at decision making problems for an individual.
An analogy that is commonly heard throughout the econ community is that studying microeconomics is like studying the individual grains of sand on a beach while macroeconomics is like looking at the entire beach itself. As with anything else, there are many exceptions to the rule where a topic is related to not one, but to both of these categories, but we’ll save that for another time.
-Economics is the study of scarcity or resource allocation.
-The economizing problem: there is a limited number of resources, but we have unlimited wants.
-Most of economics falls under two categories: macroeconomics and microeconomics.
-Macroeconomics looks at the big picture and aggregated units.
-Microeconomics looks at the small picture and individual units.
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