Having trouble understanding the definition of economics? Here's a simple breakdown of what economics is.
- The two largest branches of economics are microeconomics and macroeconomics.
- There are many applications of economics, including the stock market and international trade negotiations.
- Economics is the study of how the world's resources are produced, distributed and consumed.
Most simply put, economics is the analysis of how people use the resources available to them.
According to the American Economic Association, those resources include the time and talent people have available; the land, buildings, equipment and other tools on hand; and the knowledge of how to combine them to create products and services.
Economics provides a logical way to look at problems, drawing upon history, philosophy and mathematics to solve issues such as how families or businesses can make sound financial decisions, how countries can reduce their unemployment rates, and how to handle inflation, according to the University of Buffalo Department of Economics.
After writing the five-book series An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776, Adam Smith became known as "the father of economics." In the book, Smith champions his theory that nations attain wealth and operate best when people are free to use their skills and capital in their own self-interest.
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest," Smith wrote in the book.
Economics isn't just about money
Though economics is widely associated with money, it also involves weighing different choices or alternatives, many of which do not involve monetary issues, according to the Library of Economics and Liberty.
The organization notes that decisions you make every day can be considered economic choices – for example, whether it should be you or your roommate who cleans up, whether you should spend an hour a week volunteering for a worthy charity or send it money, or whether you should take a job so you can help support relatives or save for your future.
In his 1932 book An Essay on the Nature and Significance of Economic Science former London School of Economics professor Lionel Robbins features an all-encompassing economics definition that is still used today, according to the Library of Economics and Liberty.
"Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses," Robbins wrote.
What are the branches of economics?
In general, the goal of economics is to learn more about the choices people make to get what they want. Those who study economics generally study the production, distribution and consumption of various services and goods. Economics is divided into two main areas: microeconomics and macroeconomics.
Macroeconomics looks at the economy on a larger scale. Some examples of potential issues that might be studied in macroeconomics include the factors that influence the wealth and GDP of a country, as well as trade imbalances and negotiations. Someone in this field may also look at reasons why countries enter a recession or a depression.
In contrast, microeconomics looks at smaller and more specific issues in an economy. For example, people in this field might look at how families decide how to spend their money or how individual businesses operate.
What are some examples of economics?
Here are a couple of the most important applications of economics:
Stock market: One of the biggest examples of economics is the stock market. The stock market is a place where people can buy and sell shares of publicly traded companies. There are stock markets in nearly every developed country on Earth. An economist studies the stock market, figuring out what makes it go up or down.
Trade deals: Another key example of economics comes in the form of trade deals. When countries negotiate trade deals, they discuss import and export laws, tariffs and taxes. All of these considerations influence those countries' citizens.
Why do we study economics, and why is it important?
Economics is important because it is the study of some of the most important resources on Earth. Many of these resources are scarce and are developed into commodities that can be distributed to different groups of people. Because people have a limited number of resources, the distribution of those resources is important. These resources impact the well-being of everyone on Earth, so economics is one of the most important social sciences.
Who are some famous economists?
One of the most famous economists in recent times is Stanford University's Kenneth Arrow. In 1972, he was awarded the Nobel Prize in economics for "pioneering contributions to general equilibrium theory and welfare theory."
According to the Library of Economics and Liberty, Arrow, who died in 2017, did excellent work on the economics of uncertainty that remains a standard source for other economists.
Other famous economists in history include David Ricardo, Thomas Malthus, John Stuart Mill, Karl Marx, Alfred Marshall, John Keynes and Irving Fisher.