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.