A:

In many respects, economics is more similar to social sciences such as psychology and sociology than hard sciences such as chemistry and physics. 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 remain 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, Value and Economic Calculation

Economic actors engage in transactions that they anticipate will make them better off. If a consumer buys a loaf of bread for $3, he is implicitly stating that he values the bread more than $3. The seller, by offering the load for $3, is implicitly stating that the $3 is more valuable than the bread.

Presumably, the general market for bread in the area suggests that $3 is a sufficient price to entice businesses to undergo bread creation and assume risk. This also means that wheat farmers are sufficiently compensated, that 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 his 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.

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 25-inch television in 2020, for example. A basic understanding of human action can help economists identify meaningful tendencies in resource allocation, however.

RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What math skills do I need to study microeconomics?

    Find out how and why mathematics are used in microeconomics, what its limitations are and the kinds of math skills that economics ... Read Answer >>
  4. 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 >>
  5. Economists' assuptions in their economic model

    Economists often first build assumption before they apply them into their models. Find out why economists use unrealistic ... Read Answer >>
  6. Why are price and quantity inversely related according to the law of demand?

    Discover why the cost of a good is inversely correlated to its quantity demanded according to the law of demand in microeconomic ... Read Answer >>
Related Articles
  1. Investing

    As Hedge Funds Automate, Some Managers Prefer Human Analysts

    Some fund managers see human emotion and intuition as liabilities, but others see them as a positive.
  2. Personal Finance

    The Seven-Figure Asset You’re Probably Ignoring

    What is human capital and how should it factor into your investment decisions?
  3. 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.
  4. Investing

    The Difference Between Finance And Economics

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

    Use Price Action Trading Strategy for Results

    Bored by the fixed rules of technical and fundamental analysis? Price action trading allows you to customize your own trading strategy.
RELATED TERMS
  1. Human Capital

    Human capital is a measure of the economic value of an employee's ...
  2. Behavioral Funds

    Behavioral funds are a category of mutual funds that use behavioral ...
  3. Positive Economics

    Positive economics is the study of economics based on objective ...
  4. Evolutionary Economics

    Evolutionary economics proposes that economic processes evolve ...
  5. Price Action

    Price action refers to the movement of a security's price and ...
  6. Economic Forecasting

    Economic forecasting is th process of attempting to predict the ...
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center