What is Economics?
It is a social science, and it analyzes the choices you make and asks why you made these specific decisions.
What Is Economics?
Everyone reading this has been through a time when they had to make a single choice. But that single choice was so hard to make because we felt like we had endless options to choose from!
Well, this experience is related to economics. It is a social science, and it analyzes the choices you make and asks why you made these specific decisions.
The scale of the decision-making varies a lot because every day, not only individuals make decisions, but also big companies and countries.
Customer X might wonder if he should buy soap A or B. Company Y could wonder if they should invest in soap A or B.
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Decision-making is important for several reasons. But the main reason behind this is clear: We do not have unlimited resources!
We, humans, as well as companies and countries, have to think and choose how we want to share, create, and consume the little amount of stuff we have to satisfy our needs and wants.
The idea above is what economists spend most of their time analyzing thoroughly. But, Why? What is the concept behind this? Well, think of yourself as some customer named Bob for a moment.
When Bob visits a store and walks around all the aisles, he will see many goods and products that will catch his eye. Naturally, Bob will have an urge or want to buy so many things.
What we know is clear: The number of dollars available in Bob's bank account can help him see how much he can spend on anything he likes or wants.
As you can see, in relation to economics, we have to make decisions because we have unlimited wants, as there are many things you can buy that could give us satisfaction.
The problem is that everything we want and need costs much more than what we can afford and what is even available!
This is why studying and analyzing choices are important in the real world.
This study is properly done by economists who begin by analyzing what people do with their limited resources.
Then, they analyze the decisions they make when it comes to distributing their products, and finally, they study the consumption decisions by individuals.
This thorough analysis provides the government with important information on how a particular economy is doing and could give us answers as to why an economy is growing or not.
Not only that, but economic analysis brings us information regarding the best approaches to generate the most profit.
This is because when the analysis is done, all factors are considered, bringing us knowledge of how people, companies, and countries can grow.
Key Takeaways
- Economics is a social science that analyzes people's decisions. Not only individual people make decisions, but also big companies and countries.
- Every day, businesses and countries choose how they want to distribute, produce, and consume the limited resources they have to satisfy their needs and wants.
- Thinking at the macro and micro levels is crucial when discussing economics.
- Macroeconomics deals with variables on a global scale, such as the economy and the country. Overall, microeconomics focuses its attention on businesses and the individual actions of people.
- Some of the biggest and most important economic indicators include the economy’s GDP, the inflation rate, and unemployment statistics.
- Scarcity is the biggest problem in economics. Human beings naturally have unlimited wants and needs, but the supply available does not meet these demands.
What Is Macroeconomics
When discussing economics, it also makes sense to discuss macroeconomics.
Macroeconomics is one of the two major fields of economics. As suggested by the word “macro,” macroeconomics deals with things globally.
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Instead of studying and analyzing a person's or company's trends, macroeconomics studies the whole economy or country.
Any decision on the production and distribution of resources made by economies is analyzed thoroughly by macroeconomists.
That includes figuring out trends regarding performance and output that are associated with those decisions, which as a result, will give these economists the ability to forecast how a particular economy will look at some point in the future.
In macroeconomics, data is collected on the performance of an economy after a certain policy has been made or changed.
If you know someone who is a macroeconomist, chances are they would have a good idea of an economy’s weak points and strong points and what is causing these fluctuations in economic growth.
Macroeconomics also studies rates affecting the overall economy, such as interest and inflation rates.
It looks at the overall GDP and employment percentages for a given economy, which provides a better look at how our resources are utilized and if it is done efficiently.
It also focuses on studying the overall money circulation around the economy and tells us the economy’s stance regarding the money supply and if things are sustainable.
It compares the money supply and the inflation percentage to determine if the economy should decrease or increase the money supply to shift the inflation rate.
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Without macroeconomics, we wouldn't be able to determine what needs to be done with our money supply.
You cannot assume that a significant amount of money supply is good for our economy because, in some cases, that could ruin an economy and increase the prices of all goods, resulting in a recession.
This is where we rely on macroeconomic studies to help us see what needs to be done and what policies need to be created to improve the health of our economy!
What Is Microeconomics
The other main and important branch of economics is called microeconomics.
When it comes to microeconomics, as the word “micro” suggests, we look at things on a smaller scale. This means, unlike macro, micro focuses on businesses and people's individual actions.
All decisions on the production and distribution of resources made by businesses and people are studied in macroeconomics.
This means studying questions like: Given the number of resources this company has, what decisions will they make to allocate these goods properly?
Or, given that this consumer can make one purchase out of these three options, why will the consumer choose option 2 instead of the other options? What was their thought process behind this decision? What factors influenced the consumer’s decision?
In economics, we know that people's choices also change as prices increase or decrease.
Changes in the price of a product can change consumers' demand for that product. This does not mean consumers no longer want or benefit from this product; it just means they are reconsidering how to allocate their money due to price changes.
In addition, since we are looking at things from a micro perspective, micro studies how companies are run, including all the steps to create a final product, such as resource allocation, production, and distribution.
If you ask yourself what makes micro important, then you need to consider the topic of scarcity!
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Scarcity is the biggest factor when it comes to the subject of economics. Simply put, we don't have unlimited resources to spread around, and the demands and needs of people always exceed what is available.
On the micro level, we must look at what businesses are doing to avoid the scarcity problem.
This could give other businesses insight into what works and what doesn't to help further grow their company. That includes possibly changing prices to increase demand or decreasing costs to increase profits.
Main Economic Measures
In economics, several measures and variables are used to inform us how an economy is doing.
Below are the main measures:
Gross Domestic Product (GDP)
Gross Domestic Product is one of the main variables used to help us understand the health of our economy. It gives insight into the country's production, consumption, and distribution of goods and resources.
You can think of a gross domestic product as the value of an economy and how much all the production of goods and services is worth at a specific time.
Let’s say person A owns a factory in Canada. All the output produced from this factory will be included in the GDP of Canada.
Most of the time, a high GDP number indicates a healthy economy and a low GDP suggests a poor or very bad economy. This is the main variable that professionals like investors and traders look at when making decisions.
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A thorough analysis of the GDP can tell economists what the driving forces of the economy are and in what areas the economy is lacking. This is important as it helps the government indicate what could be holding them back in terms of growth.
Unemployment Statistics
Statistics on overall employment and unemployment levels are important indicators in economics.
If the unemployment rate is high, it could mean the economy's overall health is not doing good. When companies are not making much money and production is decreasing, unemployment will naturally go up!
Not enough money means companies can't afford the costs of labor. In other cases, employment rates can decrease because companies are paying lower wages due to economic or market struggles.
Logically speaking, if fewer jobs are available, it is most likely because the economy isn’t doing great. So, the number of people with a job will decrease because of this.
The process of unemployment comes in a circular flow. Why? Because all parties involved are affected by this. First, if you are unemployed, there is less income in your family household. This affects not only your family but your country as well.
You are now contributing less to the economy by buying less, and additionally, if you are unemployed, you are not providing any service to the economy either. This results in overall less output produced and leads to a deteriorating economy.
As you can see, unemployment also affects those currently employed because they are now at risk of either losing money or being unemployed due to less economic progress.
Inflation Rates
Inflation rates are huge economic indicators. The amount of money circulating around the economy gives us huge insight into the direction of the economy.
A high inflation rate, which usually means a large amount of money supply, is not necessarily a good thing.
Too much money circulating is unhealthy for the economy, as it increases the prices of all goods, and most importantly, the value of a country’s currency becomes weak.
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When goods prices are skyrocketing, consumers consume less, which leads to a lower standard of living for many households.
In addition, less consumption overall can lead to businesses failing as they are not generating enough profits. When businesses fail, unemployment rates are expected to increase, and thus the whole economy continues to lose power.
The inflation rate indicator continues to be one of the most valuable pieces of information as it encourages the central bank to step in and establish policies that could put the economy back on its feet.
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