1. Economics Basics: Introduction
  2. Economics Basics: What Is Economics?
  3. Economics Basics: Supply and Demand
  4. Economics Basics: Utility
  5. Economics Basics: Elasticity
  6. Economic Basics: Competition, Monopoly and Oligopoly
  7. Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade
  8. Economic Basics: Measuring Economic Activity
  9. Economics Basics: Alternatives to Neoclassical Economics
  10. Economics Basics: Conclusion

Economics is a field of study that has become increasingly relevant in our globalized, financialized society. The economy is part of our collective conscious and a buzzword that links personal finances to big business and international trade deals. Economics deals with individual choice, but also with money and borrowing, production and consumption, trade and markets, employment and occupations, asset pricing, taxes and much more. What then is the definition of economics? One way to think of it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants given a world with scarce resources. In other words, economics tries to explain how and why we get the stuff we want or need to live. How much of it do we get? Who gets to have more? Who makes all this stuff? How is it made? These are the questions and decisions that economics concerns itself with.

As an individual, for example, you constantly face the problem of having limited resources with which to fulfill your wants and needs. As a result, you must make certain choices with your money – what to spend it on, what not to spend it on, and how much to save for the future. You'll probably spend part of your paycheck on relative necessities such as rent, electricity, clothing and food. Then you might use the rest to go to the movies, dine out or buy a smartphone. Economists are interested in the choices you make, and investigate why, for instance, you might choose to spend your money on a new Xbox instead of replacing your old pair of shoes. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack. The underlying essence of economics is trying to understand how individuals, companies, and nations as a whole behave in response to certain material constraints.

Adam Smith (1723 - 1790), is often considered the "father of modern economics." His book "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776) was the first fully elaborated attempt to understand why some nations prospered while others suffered widespread poverty. He famously argued that individuals working for their own self-interest could nonetheless create a stable and well-provisioned society through a mechanism he called  the invisible hand of the market. (See also: 'Adam Smith and 'The Wealth Of Nations.')

Smith, however, was not the first to write on economic matters. Other scholars of what was then known as political economy wrote prior to "The Wealth of Nations," but Adam Smith was one of the first to identify the unique economic changes that accompanied the birth of industrialization and capitalist production. Smith’s work was followed by David Ricardo’s "Principles of Political Economy and Taxation" (1817) and later by Karl Marx in "Capital" (1867). Each of these authors sought to explain how capitalism worked and what it meant for producers and workers in the capitalist system. (See also: What is the difference between Communism and Socialism?)

In the late 19th century, the discipline of economics became its own distinct field of study. Alfred Marshall, author of "The Principles Of Economics" (1890) defined economics as a social science that examines people's behavior according to their individual self-interests. He wrote, "Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man." In the early 20th century, however, there was a push toward legitimizing economics as a rigorous science alongside the physical sciences like chemistry and physics. As a result, mathematical models and statistical methods were brought to the forefront along with a number of strong assumptions that are needed to make those models work. For example, modern mainstream economics makes the assumption that human beings will always aim to fulfill their individual self-interests. It also assumes that individuals are rational actors in their efforts to fulfill their unlimited wants and needs. It also makes the claims that firms exist to maximize profit and that markets are efficient. This school of economics, which has come to dominate both the academic field of economics as well as the practical application of economic theory in policy and business, is known as neoclassical economics. (See also: The Difference Between Finance And Economics.)

The bulk of this tutorial will concern itself with this line of neoclassical economic theory. Other strands of so-called “heterodox” economics have sprung up to challenge the mainstream model, and other social sciences such as psychology and sociology have added valuable insight to the mechanical models of pure economics. Sometimes rejected as fringe elements, mainstream economics is today increasingly tolerant of some these ideas and even go so far as try to incorporate alternative theory into its own. Some of these will be examined briefly at the end of this tutorial.

First, we start our tutorial with a brief overview of what economics is and go over some basic concepts before proceeding.


Economics Basics: What Is Economics?
Related Articles
  1. Managing Wealth

    The Science of Making Better Investment Decisions

    Neuroeconomics attempts to bridge neuroscience, cognitive psychology and economics in order to understand the mechanisms underlying economic decision making.
  2. Insights

    Why Can't Economists Agree?

    There are many reasons why economists can be given the same data and come up with entirely different conclusions.
  3. Insights

    Microeconomics

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

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  5. Managing Wealth

    Save Money by Analyzing Economic Trends

    It may seem like a tactic for active traders, but following economic trends can help you save and make money.
  6. Insights

    Macroeconomics

    Find out everything you need to know about macroeconomics.
Frequently Asked Questions
  1. What do the numbers that follow the bid and ask numbers in stock quotes represent?

    These numbers are called the bid and ask sizes, and represent the aggregate number of pending trades at the given bid and ...
  2. What is the Exponential Moving Average (EMA) formula and how is the EMA calculated?

    Learn the formula for calculating both simple moving averages and exponential moving averages, indicators that are frequently ...
  3. I placed a limit order to buy a stock after the market closed, but the stock's price gapped above the entry price and my order never got filled. How can I prevent this from happening?

    You can minimize the chances of this situation happening if you understand two types of orders: the buy-stop order and the ...
  4. China vs Hong Kong stock: Is H-shares and A-shares the same?

    Learn what the difference between A-shares and H-shares of publicly listed companies in China and Hong Kong stock exchange. ...
Trading Center