When discussing economics, it is important to define both what it is as well as what it isn't, because many people have misconceptions as to what the field actually studies.
What do you think economics is all about? Most people generally define economics along the lines of studying money, or financial markets, such as the stock market. Well, this may surprise you, but the basic definition of economics is the study of how people and societies make decisions.
It is not just about money or math, although economists are going to use a mathematical framework to study why people make the decisions they do. However, this is certainly not just a math class.
Economics is a social science, which is defined as an academic discipline that requires the examination of variables that affect the quality of human life.
Specifically, the direction that economics takes as a social science is that it focuses on the following:
A fundamental idea of economics is that we choose for good reasons. Indeed, we have all made bad decisions, but generally speaking, any time you make a choice, you are weighing costs and benefits and picking the best combination of those things.
Now, when is the last time you reacted to an incentive? We react to incentives every day of our lives.
EXAMPLEFor example, suppose you are at the mall and looking at a full price pair of jeans that are quite expensive, at $120 a pair. Should you buy them or not?
When we add up our individual choices, those become societal choices.
EXAMPLEA societal choice would be whether or not the local government should spend the money to build a new road. If they decide to spend the money to build that new road, they are probably going to have to take that taxpayer money out of another area, such as education. However, the area may really need the new road, so the benefits may outweigh the costs. If that is the case, then they are going to build the new road.
As mentioned before, our values are not all the same; not all of us like expensive blue jeans. Similarly, when we are comparing and contrasting countries, values and government systems are extraordinarily different, which means that their economic systems are going to be different as well.
When we change laws, people react in different ways because they have a different incentive structure, and therefore, they behave differently.
EXAMPLEAn extreme example would be Communist North Koreans. The people living in Communist North Korea are going to have an extremely different incentive structure than the people do in the United States, which is capitalist. We know that these countries are very different politically, but they are also vastly different economically.
Do you think any field of study should remain exactly the same over time? Most of us would likely agree that it should not. Economics is no different. It is a continually changing, dynamic field.
The dominating economic theory at the time was a very laissez-faire or hands-off approach, with the assumption that if the government just stayed out of it, the economy would take care of itself.
However, we know now that the Great Depression lasted an extremely, long time. Many economists started questioning how long we should wait, that perhaps government intervention was necessary after all. This brought a whole new way of looking at the economy into play.
Fast forward to today, are we changing right now? Should we be looking at different ways of viewing the economy after emerging from the last recession? Many people think that we should.
So, can economists predict the future? Some people feel that economists are just as ineffective as meteorologists who cannot seem to predict the weather. They think that economists should be able to see everything coming in the economy--each recession or fluctuation in the stock market.
However, instead of a predicting discipline, what economics tries to do is to explain.
EXAMPLEFor example, suppose that store at the mall selling the jeans decides to mark those jeans on sale half off. Some consumers are going to respond to that rationally and will now purchase the jeans, whereas they would not before.
These two examples illustrate that economics does not necessarily predict consumer behavior in either case. Instead, it explains why people reacted the way that they did.
Again, we are coming back to the idea of human behavior and looking at choices that people make, and the role of incentives in those choices. In this case, the incentive for consumers to buy the jeans was a lower price, and the incentive for people to purchase a house was lower interest rates.
When do you usually hear quotes from economists or about economics in general? You likely hear about it on the news, hearing pundits talking about the financial markets and how the stock market performed today.
However, economics is much more than this. We already defined economics as a social science, but it is also related to and studied in many other subject areas, such as, but not limited to:
Anywhere there is a cost/benefit scenario in which costs and benefits need to be weighed and decisions need to be made, economists are going to be consulted. This can be in regards to changes in the health care industry, or even the environment.
Economics is generally divided into two different components: microeconomics and macroeconomics.
Microeconomics is an area of economic study that focuses on specific markets, choices and behaviors that affect price, costs, and demand.
Now, "micro" means small, so therefore, microeconomics is more specific.
EXAMPLEFor example, microeconomics would involve looking at a specific industry like the automobile industry, studying the prices of cars and wages in that industry.
"Macro," on the other hand, means big. It follows, then, that macroeconomics is 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.
Macroeconomics is more general because, as mentioned, it involves taking a step back. Instead of looking at the prices of something specifically--like apples or oranges or cars--we would be asking ourselves if all prices had gone up over the last year in general.
Source: Adapted from Sophia instructor Kate Eskra.