Economics

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The term economics comes from the Ancient Greek, "custom" or "law"), hence "rules of the house(hold)".

Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.[1] A definition that captures much of modern economics is that of Lionel Robbins in a An Essay on the Nature and Significance of Economic Science|1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."[2] Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business and finance but also in crime,[3]

Common distinctions are drawn between various dimensions of economics: between positive economics (describing "what is") and normative economics (advocating "what ought to be") or between economic theory and applied economics or between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus".[4]) ). However the primary textbook distinction is between microeconomics ("small" economics), which examines the economic behavior of agents (including individuals and firms) and "macroeconomics" ("big" economics), addressing issues of unemployment, inflation, monetary and fiscal policy for an entire economy.

Contents

Microeconomics

Microeconomics looks at interactions through individual markets, given scarcity and government regulation. A given market might be for a product, say fresh corn, or the services of a factor of production, say bricklaying. The theory considers aggregates of quantity demanded by buyers and quantity supplied by sellers at each possible price per unit. It weaves these together to describe how the market may reach equilibrium as to price and quantity or respond to market changes over time. This is broadly termed supply and demand analysis. Market structures, such as perfect competition and monopoly, are examined as to implications for behavior and economic efficiency. Analysis of change in a single market often proceeds from the simplifying assumption that behavioral relations in other markets remain unchanged, that is, partial-equilibrium analysis. General-equilibrium theory allows for changes in different markets and aggregates across all markets, including their movements and interactions toward equilibrium.[5][6]


Markets

Supply and demand, prices and quantities

The theory of supply and demand is an organizing principle to explain prices and quantities of goods sold and changes thereof in a market economy. In microeconomic theory, it refers to price and output determination in a perfectly competitive market. This has served as a building block for modeling other market structures and for other theoretical approaches.

Firms

One of the assumptions of perfectly competitive markets is that there are many producers, none of whom can influence prices or act independently of market forces. In reality, however, people do not simply trade on markets, they work and produce through firms. The most obvious kinds of firms are corporations, partnerships and trusts. According to Ronald Coase people begin to organise their production in firms when the costs of doing business becomes lower than doing it on the market.[7] Firms combine labour and capital, and can achieve far greater economies of scale (when producing two or more things is cheaper than one thing) than individual market trading.

Labour economics seeks to understand the functioning of the market and dynamics for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting patterns of wages and other labour income and of employment and unemployment, Practical uses include assisting the formulation of full employment of policies.[8]

Industrial organization studies the strategic behavior of firms, the structure of markets and their interactions. The common market structures studied include perfect competition, monopolistic competition, various forms of oligopoly and monopoly.[9]

Financial economics, often simply referred to as finance, is concerned with the allocation of financial resources in an uncertain (or risky) environment. Thus, its focus is on the operation of financial markets, the pricing of financial instruments, and the financial structure of companies.[10]

Managerial economics applies microeconomics analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as operations research and programming and from statistical methods such as regression analysis in the absence of certainty and perfect knowledge. A unifying theme is the attempt to optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions.[11][12]

Public sector

Public finance is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programs, effects on economic efficiency and income distribution of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of public choice theory, models public-sector behavior analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.[13]

Much of economics is positive, seeking to describe and predict economic phenomena. Normative economics seeks to identify what is economically good and bad.

See also

Notes

  1. ↑ Clark, B. (1998). Political-economy: A comparative approach. Westport, CT: Preager.
  2. ↑ , p. 16
  3. ↑ David D. Friedman|Friedman, David D. (2002). "Crime," The Concise Encyclopedia of Economics. Accessed October 21, 2007.
  4. ↑ Davis, John B. (2006). "Heterodox Economics, the Fragmentation of the Mainstream, and Embedded Individual Analysis,” in Future Directions in Heterodox Economics. Ann Arbor: University of Michigan Press.
  5. ↑ Mark Blaug|Blaug, Mark (2007). "The Social Sciences: Economics," Microeconomics, The New Encyclopædia Britannica, v. 27, pp. 347–49. Chicago. ISBN 0852294239
  6. ↑ Hal R. Varian|Varian, Hal R. (1987). "Microeconomics", The New Palgrave: A Dictionary of Economics, v. 3, pp. 461–63. London and New York: Macmillan and Stockton. ISBN 0-333-37235-2
  7. ↑ Coase, The Nature of the Firm (1937)
  8. ↑ Freeman, R.B. (1987). "Labour Economics", The New Palgrave: A Dictionary of Economics, v. 3, pp. 72–76.
  9. ↑ Schmalensee, Richard (1987). "Industrial Organization", The New Palgrave: A Dictionary of Economics, v. 2, pp. 803–808.
  10. ↑ Ross, Stephen A. (1987). "Finance", The New Palgrave: A Dictionary of Economics, v. 2, pp. 322–26.
  11. ↑ NA (2007). "managerial economics".
  12. ↑ Hughes, Alan (1987). "Managerial Capitalism", The New Palgrave: A Dictionary of Economics, v. 3, pp. 293–96.
  13. ↑ Musgrave, R.A. (1987). "Public Finance", The New Palgrave: A Dictionary of Economics, v. 3, pp. 1055–60.

References

  • Nicholas Barr (2004) Economics of the Welfare State, 4th ed., Oxford University Press
  • Joseph E. Stiglitz (2000) Economics of the Public Sector, 3rd ed., Norton Press

External links

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