Text II What Is Economics?

What is economics? The word “economics” derives from the Greek word “oikonomika” that means household management. Economics came of age as a separate area of study with the publication of Adam Smith’s “The Wealth of Nations”. Adam Smith is often considered to be the founder of modern day economics because he was the first writer to outline and appraise the workings of a free market economy. Major economic thinkers include David Ricardo, Thomas Malthus, John Mill, Karl Marx and others.

We can define economics as the social science that reveals and analyzes how society chooses from among scarce resources to satisfy its needs. In other words economics is the science that deals with production, distribution and consumption of commodities. Another definition says that economics is the study of the production of wealth and the consumption of goods and services in a society, and the organization of its money, industry and trade. In fact one common definition of economics is “the study of how people make living”.

Why should we study economics? There are several very good reasons, all of which involve us .Some of them have to do with us as individuals, some with us as earners or as spenders, some with us as citizens and finally as future economists. The food we eat, the dwelling we live in, the clothes we wear and the way we spend our leisure time are all affected by economic forces

It is difficult to give a full and accurate definition of economics, but it is possible to indicate what problems economics is interested in. They are the factors that affect prices of goods and services and also resources necessary to produce them. Economics is also interested in sellers’ and buyers’ behaviour in the market, in the relationship between “price system” and “market mechanism”.

There are three main approaches to (or branches of) economics: microeconomics, macroeconomics and development economics.

Microeconomics focuses on individual economic units. The economic behaviour of either individual consumers or firms or industries is studied by microeconomics. The distribution of products and income among all these units is also analyzed by microeconomics. In this field of economics companies, firms and individuals are considered both as suppliers of labour and as consumers of goods and capital.

The central components of microeconomics are demand, supply and market equilibrium. Demand refers to how individuals or households form their demands for different goods or services. Supply refers to how firms decide which and how many goods or services they will supply and what combination of factors of production they should employ in supplying them. Market equilibrium refers to how markets enable these supplies and demands to interact.

The term “macroeconomics” was first used in the 1930s. The world depression that began in 1929 required the study of such macroeconomic questions as achievement of full employment and economic growth by means of proper government policies. This area of economics was developed by the British economist John Maynard Keynes.

Macroeconomics is the study of behaviour of the economy as a whole. It is the branch of economics that examines and explains economic facts for the whole community or nation. It is concerned with the study of whole economies or systems, including such aspects as government income and expenditure, fiscal policy, investment, inflation, money, consumption, employment and unemployment. Macroeconomics studies broad economic events that are largely beyond the control of individual decision makers and yet affect nearly all firms, households and other institutions in the economy.

Specialists in macroeconomics are particularly interested in understanding those factors that determine inflation, unemployment and growth in the production of goods and services. Such an understanding is necessary in order to develop policies that encourage production and employment while controlling inflation.

Macroeconomic theory is largely concerned with what determines the size of GNP (Gross National Product), its stability and its relationship to unemployment and inflation. The GNP is the total value of goods and services produced in an economy during a given period of time, usually a year.

The third main field of economics, that is, development economics, studies the factors of economic growth and how these factors are used by governments in order to achieve high living standards.

There are also several specialized areas of study. Among them are monetary economics, international economics, labour economics, industrial economics, agricultural economics, growth economics, consumer economics, business economics, etc.