Meaning and Relevance of Economics

Meaning and Relevance of Economics

• Economics is defined as the science of scarcity and choice
• It offers insight into the management of scarce resources and human survival
• Economics attempts to explain economic actors' behavior and interactions
• This explanation is in terms of the items of value they exchange, which can be tangible or intangible, monetary or nonmonetary
• Economic actors can be individuals, households, firms, industries, governments, or entire countries

Core Concerns of Economics

• How scarce resources should be allocated among competing wants
• What mix of products should be made, and how and for whom they should be made
• How sufficient economic growth can be attained to increase societal well-being
• Productive capacity can be increased
• How productive capacity should be utilized to achieve full employment with stable prices

Resource Allocation and Social Conventions

• Any allocation of scarce resources involves balancing the needs of different groups
• Economics is directly related to politics, ideology, and values
• Resource allocation relies on a combination of four mechanisms
• The market system
• Authority of a social or governmental institution
• Persuasion through ideology, indoctrination, or education
• Individuals' moral codes

Economics as a Discipline

• Economics deals with problems associated with scarce resources
• These arise from the inability to regenerate the majority of resources
• Most resources are finite like oil, gold and diamonds; others are infinite, such as trees
• Scarcity puts constraints on consumers, requiring them to make choices between needs and wants
• Consumers must manage their resources effectively, prioritizing needs over wants

What Economists Do

• Economists need skills in several fields but are masters of none
• They borrow methods of investigation from many fields
• These are adjusted to fit the particular problems of economic events
• Usefulness, not methodological purity, is the deciding factor for including a technique in an economist's toolkit
• Mathematical reasoning and historical study are used extensively
• Statistical inference plays a role but economists must adapt standard procedures to suit their data

Economic Inquiry

• The master economist needs to understand symbols and speak in words

• They must contemplate the particular in general, and blend abstract and concrete thinking

• They study the present in light of the past to shape the future

• No part of human nature or institutions must be ignored

• They must be purposeful yet disinterested, aloof yet grounded

• Economics is distinguished more by the problems it tackles than the techniques

• An introductory course should help students approach social problems from pragmatic and dispassionate views

Tools for Economic Analysis

• Economic investigations need different tools like abstraction, theories, and models
• Abstraction involves ignoring details to focus on the most important factors
• By abstracting, human action can be analyzed at a simple level
• Theories should be based on realistic assumptions
• Without realistic assumptions, the real world is hard to study

Theories

• Theories explain various aspects of human behaviour, factual relationships, and how these relationships work
• Simplification is necessary, but theories must capture the essence of the economic problem it aims to solve
• Economists theorize out of necessity, not luxury
• Economic theory provides a logical structure for organizing and analyzing economic data
• It proceeds deductively from assumptions to conclusions, which are then tested against data
• Without theory, economists would be lost; with it, they can attempt to understand the world

Economic Models

• Models describe cause and effect relationships
• Economists use the term similarly to children's understanding
• A model is a simplified, small-scale version of an aspect of the economy
• They can be expressed via equations, graphs, symbols, or even in words qualitatively or quantitatively by form
• Models are employed in order to observe the working of the vehicles up close in order to see the way they behave under normal circumstances
• Experiments aid to make educated guesses as to how similar events occur in reality

Rationality in Economic Models

• Many models assume that decision-makers behave rationally
• Rationality doesn't relate to motives, but with acting in the right way
• Rational behavior is designed to achieve the desired ends, whatever those may be
• It involves the decisions that are most effective in achieving objectives

Objectives and Rationality

• Objectives themselves aren't rational or irrational unless self contradictory
• Economic actors can be predicted as rational behavior follows a logical sequence
• The rationality of an economic actor involves mobilization of resources/strategy and has nothing to do with value judgement

Microeconomics

• Microeconomics emphasizes individual consumption behavior, utility maximization, firms’ profit maximization, and cost minimization
• It includes market analysis through demand and supply, setting equilibrium prices, distributing resources, and optimizing resource utilization and allocation

Macroeconomics

• Macroeconomics is a branch of economics concerned with the aggregate, or overall, economy
• It deals with factors like national output, income, unemployment, balance of payments, and general price level
• The study of macroeconomics began with John Maynard Keynes' ideas in the 1930s
• Keynes's revolutionized thinking on unemployment, money supply, and inflation
• Unemployment causes social distress, hence it received the most attention in theory