Economics

Loading the player...

What is 'Economics'

Economics is a broad term referring to the scientific study of human action, particularly as it relates to human choice and the utilization of scarce resources. Economic analysis often progresses through deductive processes, much like mathematical logic, where the implications of specific human activities are considered in a "means-ends" framework.

BREAKING DOWN 'Economics'

Specific branches of economic thought emphasize empiricism in economics, rather than formal logic. This is most true in macroeconomics or Marshellian microeconomics, which attempt to use the procedural observations and falsifiable tests associated with the natural sciences. Since true experiments cannot be created in economics, empirical economists rely on simplifying assumptions and retroactive data analysis. Some economists argue economics is not well suited to empirical testing, and such methods often generate incorrect or inconsistent answers.

Pejoratively known as the "dismal science," modern economics is primarily focused on the production, distribution and consumption of goods and services. It tries to determine how people, businesses and governments should best associate with each other and organize activity to achieve maximum output.

The term "dismal science" was first used by Scottish historian Thomas Carlyle, who may have written it to describe the incorrect predictions by Thomas Robert Malthus about population growth and famine; other sources suggest Carlyle actually targeted economist John Stuart Mill. Another Scottish writer, the philosopher Adam Smith, is often credited with founding modern economics after the publication of his 1776 book "An Inquiry Into the Nature and Causes of the Wealth of Nations."

Unlimited Wants and Limited Means

One of the earliest recorded economic thinkers was the Greek poet Hesiod, who wrote that labor, materials and time needed to be allocated efficiently to overcome scarcity. This is the principle problem of economics: human beings occupy a world of unlimited wants and limited means. For this reason, the concepts of efficiency and productivity are held paramount by economists. Increased productivity and a more efficient use of resources could lead to a higher standard of living.

Labor and Trade

The building blocks of economics are the studies of labor and trade. Since there are many possible applications of human labor and many different ways to acquire resources, it is difficult to determine which methods yield the best results in equilibrium.

Economics demonstrates, for example, that it is more efficient for individuals or companies to specialize in specific types of labor and then trade for their other needs or wants, rather than trying to produce everything they need or want on their own. It also demonstrates trade is most efficient when coordinated through a medium of exchange, or money.

Incentives and Subjective Value

Economics focuses on the action of human beings, who have imperfect knowledge and can be unpredictable or inconsistent. Individual action is also highly specific and based on personal subjective values. As such, economic laws tend to be very general and focused on tendencies. These are discovered by studying human incentives. Economics can say profits incentivize new competitors to enter a market, for example, or that taxes disincentivize consumption.

RELATED TERMS
  1. Dismal Science

    A term coined by Scottish writer, essayist and historian Thomas ...
  2. Economy

    Economy is the large set of inter-related economic production ...
  3. Economic Efficiency

    A broad term that implies an economic state in which every resource ...
  4. Scarcity

    Refers to the basic economic problem, the gap between limited—that ...
  5. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  6. Human Resource Planning - HRP

    The ongoing process of systematic planning to achieve optimum ...
Related Articles
  1. Markets

    Economics 101

    Economics is the study of how individuals, governments, businesses and other organizations make choices that effect the allocation and distribution of scarce resources.
  2. Markets

    Economics Basics: What Is Economics?

    Before diving into economics first Investopedia explains the concept of scarcity and the differences between the two branches of study within economics: microeconomics and macroeconomics.
  3. Markets

    Economics Basics: Introduction

    Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor ...
  4. Markets

    What's Human Capital?

    Human capital is a company asset, but it’s not listed on the balance sheet. Human capital is all of the creative skills and knowledge embodied in the employees of a company -- skills that bring ...
  5. Markets

    Macroeconomics: Introduction and History

    By Stephen Simpson In general, economics is the study of how agents (people, firms, nations) use scarce resources to satisfy unlimited wants. Macroeconomics is the branch of economics that concerns ...
  6. Markets

    Scarcity

    Scarcity is the basic economic problem that arises because people have unlimited wants, but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources ...
  7. Markets

    Macroeconomics

    Find out everything you need to know about macroeconomics.
  8. Markets

    Is Infinite Economic Growth on a Finite Planet Possible?

    While the finite nature of Earth's resources limits the direction of economic growth, it does not mean that infinite economic growth is impossible.
  9. Markets

    The Uncertainty Of Economics: Exploring The Dismal Science

    Learning about the study of economics can help you understand why you face contradictions in the market.
  10. Markets

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
RELATED FAQS
  1. What is the difference between accounting and economics?

    Discover the difference between accounting and economics by comparing and contrasting the financial discipline of accounting ... Read Answer >>
  2. What kinds of topics does microeconomics cover?

    Read about the purpose, derivations and uses of microeconomics, and see how the interaction of scarcity and choice drives ... Read Answer >>
  3. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Answer >>
  4. What are key economic growth rates that can be used to determine the economic health ...

    Discover the indicators that correlate with real economic health, and learn why many traditional metrics do not function ... Read Answer >>
  5. What causes human capital to depreciate?

    Read about what life events may cause a worker's human capital to depreciate, both in absolute terms and relative value compared ... Read Answer >>
  6. How do I differentiate between micro and macro economics?

    Differentiating between microeconomics and macroeconomics is primarily concerned with the difference of the scales of the ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center