Definition of economics

UNIT 1 ECONOMICS

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek which means management of a household, administration

Political economy was the earlier name for the subject, but economists in the latter 19th century suggested 'economics' as a shorter term for 'economic science' that also avoided a narrow political-interest connotation and as similar in form to 'mathematics', 'ethics', and so forth.

A focus of the subject is how economic agents behave or interact and how economies work. Consistent with this, a primary textbook distinction is between microeconomics and macroeconomics.

Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firms or as buyers and sellers) and markets, and their interactions.

Macroeconomics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy.

Economic analysis may be applied throughout society, as in business, finance, health care, and government, but also to such diverse subjects as crime, education, the family, law, politics, religion, social institutions, war, and science.

Like many other sciences, economics uses models to understand economic problems. A model often helps an economist to make correct predictions. The economist usually follows several rules when he makes a model of economic behavior.

First, real life is complex and it is not possible for an economist to include all the details in a model. So, a model is an abstraction from real life. A model usually includes only essential elements and relationships of a particular economic situation.

Second, if an economist has two different models of one phenomenon, he always chooses the model that predicts the results of a particular phenomenon more accurately.

Third, although models are helpful in economic analysis, an economist always studies the actual economic situation before he makes decisions.

It is not enough to make models, it is also necessary to collect and study actual data in order to know how accurate a model is.

An economist examines the role of markets in making decisions, when and how markets are regulated and the role of the government. An economist addresses issues such as:

• Will an increase in taxes stimulate the economy?
• Will a fall in the value of a currency cause interest rates to rise?
• What causes inequality in the distribution of wealth?

To answer these macro, or community, questions, the economist has to understand decisions made at the micro, or individual level, including:

• How do people and firms react to economic incentives such as goods and prices, taxes, different legal rules or market structure?
• What does this imply for the wellbeing (welfare) of people?