A:

In many respects, economics is more similar to social sciences such as psychology and sociology than physical sciences such as chemistry and biology. Economics (particularly microeconomics) is ultimately concerned with why, when and how human beings trade with each other. Different schools of thought have taken the field towards increasing levels of mathematical sophistication and model-based regression forecasting, but the building blocks continue to be human actors and their behaviors.

Consider the laws of supply and demand in economics. When placed on a microeconomic chart, it looks as though price is determined through a mechanical adjustment based on the quantity of a product and the number of buyers in the market. In reality, a price is the agreed-upon level at which a seller is willing to part with a good and the buyer is willing to assume it. Consumers have to compete with other consumers when bidding for a good. Producers have to compete with other producers for those consumers. It's the actions of individual actors that determine economic reality — not the other way around.

The field of economics attempts to understand the patterns of individual decisions within the context of a world that has scarce resources.

Human Action and Determining Value

Economic actors will regularly engage in transactions that they anticipate will make them better off. If a consumer buys a loaf of bread for three dollars, he/she is implicitly stating that they value the bread more than three dollars. The seller, by offering the loaf for three dollars, is implicitly stating that the three dollars is more valuable than the bread.

Presumably, the general market for bread in the area suggests that three dollars is an acceptable price to entice businesses to become bread retailers and assume the associated risks. This also means that wheat farmers are sufficiently compensated, transportation is economically feasible and hundreds (if not thousands) of other human actions can be coordinated in a sustaining way.

Each actor in the chain of financing, production and consumption is receiving enough value to entice their cooperation. To save time, economics studies the price rather than breaking down every single trade, transaction and motivation. The root is a huge series of human value judgments and behaviors. The price, in a sense, economizes on the information.

Analyzing and Understanding Human Behavior

Economics appears to be superficially concerned with abstractions such as demand curves, production possibilities frontiers or interest rates. None of those inputs actually exist in a tangible sense. However, the root is always individual human action. Every actor is simultaneously coordinating his activities in a meaningful, value-driven way. Those values and actions are dynamically captured through broad economic indicators and subsequently analyzed.

Human action cannot be predicted with any certainty. No economist knows how much any single consumer will be willing to pay for a 50-inch television in 2024, for example. A basic understanding of human action can help economists identify meaningful tendencies in resource allocation, however.

RELATED FAQS
  1. What is human capital and how is it used?

    Learn about the concept of human capital, how it is developed and why it is important for businesses to protect their human ... Read Answer >>
  2. How do managers measure human capital?

    Learn what human capital is, how managers measure it and how managers measure human capital's return on investment to gauge ... Read Answer >>
  3. How does government policy impact microeconomics?

    Read about how any type of government policy necessarily impacts the microeconomic decisions that are made by individuals ... Read Answer >>
  4. How is an economy formed and why does it grow?

    Find out how an economy forms and why it grows, including the role that financial markets play and how productivity increases ... Read Answer >>
  5. Human capital vs. physical capital: What is the difference?

    Learn the difference between physical capital and human capital. How to find the value of each type of capital in a company's ... Read Answer >>
  6. What are some examples of inelastic goods and services that are not affected by the ...

    Find out how the laws of supply and demand function for goods and services considered highly inelastic, including goods not ... Read Answer >>
Related Articles
  1. Financial Advisor

    Don't Ignore the Importance of Human Capital

    Are you ignoring the value of human capital in your financial planning? This oft-overlooked asset should be an important component of your financial plan.
  2. Investing

    Your Human Capital Might Be Your Greatest Asset

    When allocating your assets, don't forget one of your most valuable assets - human capital.
  3. Investing

    The difference between finance and economics

    Learn the differences between these closely related disciplines and how they inform and influence each other.
  4. Insights

    Microeconomics

    This tutorial teaches the basics of one of the most important economic topics. A must for all investors.
  5. Investing

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  6. Investing

    Why Robos Will Still Need Human Advisors

    Will a future of Robo-Advisors still need human counterparts?
  7. Insights

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
RELATED TERMS
  1. Behavioral Economics

    Behavioral Economics is the study of psychology as it relates ...
  2. Behavioral Accounting

    Behavioral accounting takes into account key decision makers ...
  3. Behavioral Funds

    Behavioral funds are a category of mutual funds that use behavioral ...
  4. Economic Value

    Economic value is the worth of a good or service determined by ...
  5. Gary S. Becker

    Gary S. Becker is an American economist who won the 1992 Nobel ...
  6. Evolutionary Economics

    Evolutionary economics proposes that economic processes evolve ...
Trading Center