The Subject Matter of Economics
What do you think of when you hear the word economics? Money, certainly, and perhaps more complicated things like business, inflation and unemployment. Economics studies all of these, but many more things as well. Perhaps you think that economics is all about the decisions that governments and business managers take. In fact, economists study the decisions that we all take every day.
Very simply, economics studies the way people deal with a fact of life: resources are scarce, but our desires for them are practically infinite. Think of a day. There are only 24 hours in it and we have to choose the best way to spend them. Our everyday lives are full of decisions like these. Every decision we make is a choice. If you spend more time working, you make more money. However, you will have less time to relax. So people need to make choices about how to use their scarce resources. Economists study these choices. They study the reasons for their decisions. They look at the effects those decisions have on our lives and society.
Economists talk about microeconomics and macroeconomics. Microeconomics deals with people, like you and me, and private businesses. It studies the economic decisions people take every day. It examines how families manage their household budgets. Microeconomics also deals with companies – small or large – and how they run their business. Macroeconomics, on the other hand, looks at the economy of a country – and of the whole world. Any economist will tell you that microeconomics and macroeconomics are closely related. All of our daily microeconomic decisions have an effect on the wider world around us.
So what do economists do? Mainly, they do three things: collect data, create economic models and formulate theories. Data collection can include facts and figures about almost anything, from birth rates to coffee production. Economists use data to build economic models, then they try to explain and predict economic events and make theories which explain why the economy works the way it does.
Economic systems
Economic system is set of principles and techniques by which a society decides and organizes the ownership and allocation of economic resources. In general, an economic system consists of individuals, industries, governments, means of production and a medium of exchange (i.e. money) for buying and selling goods and services. How these factors interact and who controls means of production are the main considerations in identifying the different types of economic systems that exist throughout the world. Economic systems are classified into three broad categories. These are command, market, and mixed economies.
In command or planned economies, government leaders take an active, leading role in production, distribution of resources. They also set production plan and prices for goods and services. Industries are government-owned, i.e. there is public property. There is no competition. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. Examples of command economies include the economies of Cuba, China, Laos, ex-Soviet-block countries.
A market economy is the opposite to a command economy. The absence of central planning is one of the major features of this economic system. Instead, consumers and their buying decisions drive the economy. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. In market economies natural resources and capital goods are usually privately owned. There is competition among businesses. It determines prices which increase the quality of product. Market decisions are mainly dominated by supply and demand. Examples of predominantly market economies include the economies of Canada, Japan, and many of the countries of Western Europe.
A mixed economy combines elements of both the command and the market economies. Under a mixed system, the private sector controls many resources of production, but government has a role in influencing the direction of the economy. The government also provides services such as education and health care. This system prevails in many countries. In a mixed economy there is flexibility in some areas and government control in others. This economic system is used in most countries. The United States are an example of this type of economy. Most decisions there are made by individuals and firms as they exchange goods, services, and resources in private markets. But some decisions are taken by the government.
In reality there is no pure market or command types of economies. All economic systems are mixed to some extent.
In the 1990s there appeared a new term transition economy to describe the countries of Eastern Europe and the former Soviet Union. Transition economies face the task of moving from a centrally-planned system of resource allocation towards a more market-oriented approach.