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What is Economics?

What is Economics?

Author: Kate Eskra

This lesson will explain the field of economics and how the field is divided.

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Hi, and welcome to economics. This is Kate. Before we get started, just a few things to let you know. As we go through, whenever you have a key term, I'll indicate that by making it red. I'll also be trying to give you some real world examples as we go along, and I will make those the color green. OK? Let's get started.

This first lesson is titled "What is Economics?" What you're going to learn in this lesson is what the subject is actually all about, and what it isn't. Because a lot of people have misconceptions as to what the field actually studies. At the end of the lesson, we'll be talking about how we divide it into two different components-- microeconomics and macroeconomics. All right, so what do you think economics is all about?

Most people generally define economics-- you know, oh, it must be studying money, or financial markets, or something along those lines. You know, the stock market. So I don't know if this definition will surprise you, but this is a pretty basic definition of economics-- the study of how people and societies make decisions. Sometimes my students are a little bit surprised by that. Really? It's not just about money? It's not math or something?

Well, you know, economists are going to use a mathematical framework to study why people make the decisions they do. But this is certainly not just a math class. Economics is a social science, and this is your first key term. A social science is defined as an academic discipline that requires the examination of variables that affect the quality of human life.

Specifically where economics is going to go as a social science is it's going to look at why we, as consumers, purchase the things that we purchase, how those things are produced in our society, and how our society allocates or distributes those things once they're produced. So that's the specifics of what kind of social science this is.

Really I like to tell people that a really, really fundamental idea of economics is that we choose for good reasons. Certainly, we've all made bad decisions. But typically speaking, any time you make a choice, you're weighing costs and benefits, and you're picking the best combination of those things. And when's the last time you reacted to an incentive? We react to incentives every day of our lives.

So here's an individual example for you. Maybe you can relate to this. Let's say you're at the mall, and you're looking at a full price pair of jeans. Let's say those jeans are really expensive, they're $120. Should I buy them? Ugh. Well you're going to be weighing costs and benefits. We know the cost, I just said, was $120. What are the benefits of them? Do you look really good in them? Will they give you a whole lot of outfits to make? How badly do you need those jeans?

Not everyone is going to make the same decision. Some of us really like expensive jeans, some of us could care less. So when we add up our individual choices, those become societal choices. An example of a societal choice would be, let's say, should the government, your local government, spend the money to build a new road? If they decide to spend the money-- the cost there-- to build that new road, they're probably going to have to take that taxpayer money out of another area, let's say education. But the benefits, the area may really need the new road. The benefits may outweigh the costs. And if that's the case, then they're going to build the new road.

Just as I said before, our values are not all the same. Not all of us like blue jeans, or expensive blue jeans. Well certainly, when we're comparing and contrasting countries, values and government systems are extraordinarily different. And so that means that our economic systems are going to be different, as well.

When we change rules, when we change laws, people react in different ways, because they have a different incentive structure, and so they behave differently. Here's a really extreme example, but one nonetheless. Communist North Koreans obviously-- the people living in communist North Korea-- are going to have an extremely different incentive structure than the people do here in our country, which is capitalist. We know that politically, these countries are very different. But they're also vastly economically different.

Do you think any field of study should really stay exactly the same over time? I think most of us would agree that it shouldn't. And so economics is no different. It's constantly changing, it's a dynamic field. I like to use the example of the Great Depression. Because before the Great Depression came about, most economists were looking at capitalism as, oh, this is the answer to everything. There will be booms, there will be busts. But these recessions are going to take care of themselves. It seems like if the government just stays out of it, it's always going to take care of itself.

And so that was a very laissz-faire, or hands off approach. And that was the dominating economic theory at the time. However, we know now that the Great Depression lasted an extremely long time. And some economists, a lot of economists, started saying, yeah, but how long are we going to wait? Sometimes maybe government intervention is necessary. And that brought a whole new way of looking at the economy into play.

Are we changing right now? Should we be looking at different ways of viewing the economy after we're emerging from this last recession? A lot of people think that we should.

My husband always make fun of me for being an economist. Because he says, you guys are just as bad as meteorologists, who can't seem to predict the weather. So he feels that economists should be able to see everything coming in the economy. You should've seen this recession, you should have seen this happening in the stock market.

But more than a predicting kind of thing, what economics tries to do is to explain. So here's an example. If that business-- let's say the store selling the jeans when you were at the mall-- if they decide to put the jeans half off, on sale, some consumers are going to rationally respond to that, and they will purchase the jeans when they hadn't before.

I don't know if any of you are impacted by the lowering of interest rates over the last few years, but my husband and I certainly were. We said three years ago, wow, rates are the lowest they've been ever. We need to take advantage of this and buy a house. And so that's what we did. These two examples are showing you that-- these aren't really predictions. It's an explanation of why people reacted the way that they did.

And so again, we're coming back to the idea of human behavior, we're looking at choices that people are making, and the incentives that we're talking about-- here, the incentive for consumers to buy more was a lower price. Here, the incentive for people to purchase a house were lower interest rates.

When do you usually hear quotes from economists or about economics in general? You hear about them on the news, right? You hear about them talking about the financial markets and how the stock market did today. But economics is a lot more than this. We already defined it as a social science. So economics is going to be related to and studied in many other subject areas. I'm only giving you a few examples here, like geography, government, and civics.

But anywhere there's a cost benefit scenario, where costs and benefits need to be weighed and a decision needs to be made, economists are going to be consulted. So they may be consulted certainly in the changes in the health care industry, even in the environment.

Finally, let's end the lesson today talking about the difference between microeconomics and macroeconomics. That's how this field is typically divided, into these two different components. So let's look at microeconomics first. Micro is an area of economic study that focuses on specific markets. That's the key word. Choices and behaviors that affect price, cost, and demand.

So micro. Micro being small, right? That's what micro would mean. So it's more specific. Some examples of that would be if we're getting specific, we're going to look at a specific industry like the automobile industry. And so we'd study the prices of cars and wages in that industry.

But now we're going to take a step back with macroeconomics. Macro means big, right? So it's an area of study that focuses on the impact of variables on the economic infrastructure in its entirety-- on a regional, national, and global level. It's more general. Because like I said, it's taking a step back. So instead of looking at the prices of something specifically, like apples or oranges or cars, we would be asking ourselves have price gone up over the last year in general? Have all prices gone up?

So I like to use this analogy sometimes. If we're looking at macroeconomics as the overall forest, microeconomics then specifically would look at the trees in that forest. Hopefully that helps a little bit.

So what did you learn today? Well, we went over what economics is not. It doesn't just involve banks and financial markets and the stock market, and its purpose really isn't to predict the economy. You learned that economics is a social science. It's looking at explaining behaviors, choices, and incentives. We talked about how it varies across countries, and it's still evolving today.

And then finally, we just ended talking about the difference between microeconomics and macroeconomics. Thanks for listening. Have a great day.

Notes on "What is Economics?"


Terms to Know


Social Science

Academic discipline that requires examination of variables that affect the quality of human life.



An area of economic study that focuses on specific markets, choices, and behaviors that affect price, cost and demand.



Area of study that focuses on the impact of variables on the economic infrastructure in its entirety on a regional, national and global level.