Economics

Updated on April 4, 2024
Article byRamya Puttaparthi Tirumala
Edited byRamya Puttaparthi Tirumala
Reviewed byDheeraj Vaidya, CFA, FRM

Definition of Economics

Economics refers to choices or decisions made by individuals, businesses, and governments regarding the production, distribution, and consumption of goods and services. It also studies their resource allocation for the same during scarcity. In short, it is a branch of social science dealing with the interaction of people with value.

Scarcity implies the limited availability of resources, such as land, capital, machinery, and labor. Economics examines effective resource utilization for the production of commodities. Also, it investigates the role of government incentives and policies in increasing production and trade efficiency. Based on how people, entities, and nations interact to find ways to meet increasing demands with scarce resources, it could be micro and macroeconomics.

Importance of Economics

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Key Takeaways

  • Economics is the field of social science that deals with the study of the scarcity of resources. It analyzes factors affecting the production, distribution, and consumption of goods and services in an economy. 
  • It examines the allocation of scarce resources by individuals, businesses, and governments. Besides, it investigates the reasons behind poverty, unemployment, and slow economic growth.
  • Understanding market changes and the behavior and performance of an economy can help in resource allocation.
  • Micro and macroeconomics are two types of Economics. They differ from each other based on decisions made by individuals, entities, and nations to meet increasing demands with limited resources.

Economics Explained

Economics focuses on studying causes of scarcity, ensuring acquisition, allocation, and utilization of scarce resources, and determining how to maximize production efficiency. The rest of the process analyzes proper distribution to and consumption of finished goods by the people.

A country’s economic activity revolves around the production, trade, and consumption of products and services. Labor, land, machinery, and capital are crucial for production. They all work together to enhance productivity. Furthermore, the efficient use of resources and raw materials results in a higher standard of living. Scarcity occurs when demand for products and services exceeds available resources, making it difficult for everyone to meet the needs of the people.

What is Economics

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A functioning market involves the decision-making by buyers and sellers, including individuals, families, entities, and societies, to keep moving. These decisions depend on market changes, behavior and performance of an economy, and policies made by the hierarchical authorities. Several factors, including laws, policies, culture, history, and geography, govern an economy.

Types Of Economics 

MicroeconomicsMicroeconomicsMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and supply.read more and macroeconomicsMacroeconomicsMacroeconomics aims at studying aspects and phenomena important to the national economy and world economy at large like GDP, inflation, fiscal policies, monetary policies, unemployment rates.read more are the two categories of economics based on scarce resource allocation. While the former focuses on individual and corporate choices, the latter is more concerned with how an entire economy interacts, trades, and makes decisions.

Types of Economics

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#1 – Microeconomics

It studies the behavior of individual consumers and decision-making by producers in times of scarcity. Other essential functions of it include:

  • Examining market structures and how entities interact to create economics systems
  • Analyzing the impact of supply or demand in economics on production and price
  • Understanding ways to reduce costs and increase profits
  • Studying the distribution of scarce resources by individuals and businesses
  • Explaining interaction of the people with value 
Factors

It considers the following factors to understand the behavior and decisions of individuals and firms:

#2 – Macroeconomics 

It studies the behavior, performance, and decisions of an economy on the domestic and global levels. Other essential functions of it include:

Factors

It considers the following factors to understand how an economy measures its domestic production concerning scarcity:

Apart from the main categories, other sub-branches of economics are:

Ecoomics Example

Let us look at the real-life economics examples to understand the concept:

Example #1

Lucy has a limited amount of money in her bank account. She prioritizes and plans what she needs to buy with the available funds. Lucy starts purchasing less expensive utilities instead of purchasing goods of a luxurious brand. It implies that she makes decisions based on the availability of money in her bank account, which is a scarce resource and adjusts her lifestyle accordingly.

Example #2

Consider a situation where the cost of gasoline is $3 per liter. People can buy 50 liters per week on average at this price. They can buy 60 liters every week if the price drops to $2.5 per liter. If the price is cut more, perhaps to $1.50 per liter, they can buy 100 liters.

Hence, as the price of gasoline decreases, the demand increases. Also, when the price is higher, the requirement declines. It shows an inverse relationship between the price and quantity.

Why Is Economics Important?

Economics studies the scarcity of resources to understand how individuals, businesses, and governments can quantify their allocation to optimize the production, distribution, and consumption of products and services. Besides, it serves many other functions:

Frequently Asked Questions (FAQs)

What is economics?

Economics is the study of scarce resource allocation by individuals, businesses, and governments during times of scarcity. It also examines their decisions or choices affecting the production, distribution, consumption of goods and services.

Why is economics important?

It serves many crucial functions for an economy, such as studying the scarcity, finding ways to optimize production, distribution, and consumption of commodities, analyzing the behavior and performance of an economy, investigating reasons for poverty, unemployment, and slower economic growth, assessing the financial decisions and behavior of individuals and businesses, etc.

What are the two major types of economics?

Micro and macroeconomics are two categories of economics. While the former focuses on individual and corporate choices in times of scarcity, the latter is more concerned with how an entire economy interacts, trades, and makes decisions on the national and international levels.

This has been a guide to Economics and its Definition. Here we discuss how does economics work along with types, examples, and factors. You may learn more from the following articles –

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