Economics is the social science that describes the factors that determine the production, distribution and consumption of goods and services.
The term economics comes from the Ancient Greek from and, hence "rules of the house ". 'Political economy' was the earlier name for the subject, but economists in the late 19th century suggested "economics" as a shorter term for "economic science" to establish itself as a separate discipline outside of political science and other social sciences.
Economics focuses on the behavior and interactions of economic agents and how economies work. Consistent with this focus, primary textbooks often distinguish between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy and issues affecting it, including unemployment of resources, inflation, economic growth, and the public policies that address these issues .
Other broad distinctions within economics include those between positive economics, describing "what is," and normative economics, advocating "what ought to be"; between economic theory and applied economics; between rational and behavioral economics; and between mainstream economics and heterodox economics .
Besides the traditional concern in production, distribution, and consumption in an economy, economic analysis may be applied throughout society, as in business, finance, health care, and government. Economic analyses may also be applied to such diverse subjects as crime, education, the family, law, politics, religion, social institutions, war, science, and the environment. Education, for example, requires time, effort, and expenses, plus the foregone income and experience, yet these losses can be weighted against future benefits education may bring to the agent or the economy. At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism.
The ultimate goal of economics is to improve the living conditions of people in their everyday life.
Definitions
There are a variety of modern definitions of economics. Some of the differences may reflect evolving views of the subject or different views among economists. Scottish philosopher Adam Smith defined what was then called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as:
J.-B. Say, distinguishing the subject from its public-policy uses, defines it as the science of production, distribution, and consumption of wealth. On the satirical side, Thomas Carlyle coined "the dismal science" as an epithet for classical economics, in this context, commonly linked to the pessimistic analysis of Malthus . John Stuart Mill defines the subject in a social context as:
Alfred Marshall provides a still widely cited definition in his textbook Principles of Economics that extends analysis beyond wealth and from the societal to the microeconomic level:
Lionel Robbins developed implications of what has been termed "erhaps the most commonly accepted current definition of the subject":
Robbins describes the definition as not classificatory in "pick out certain kinds of behaviour" but rather analytical in "focus attention on a particular aspect of behaviour, the form imposed by the influence of scarcity." He affirmed that previous economist have usually centered their studies on the analysis of wealth: how wealth is created, distributed, and consumed; and how wealth can grow. But he said that economics can be used to study other things, such as war, that are outside its usual focus. This is because war has as the goal winning it, generates both cost and benefits; and, resources are used to attain the goal. If the war is not winnable or if the expected costs outweigh the benefits, the deciding actors may never go to war but rather explore other alternatives. We cannot define economics as the science that studies wealth, war, crime, education, and any other field economic analysis can be applied to; but, as the science that studies a particular common aspect of each of those subjects .
Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behavior and rational-choice modeling expanded the domain of the subject to areas previously treated in other fields. There are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment.
Gary Becker, a contributor to the expansion of economics into new areas, describes the approach he favors as "combin assumptions of maximizing behavior, stable preferences, and market equilibrium, used relentlessly and unflinchingly." One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the "choice process and the type of social interaction that analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which the author believes economics is evolving, or should evolve.
Microeconomics
Markets
Microeconomics examines how entities, forming a market structure, interact within a market to create a market system. These entities include private and public players with various classifications, typically operating under scarcity of tradeable units and government regulation. The item traded may be a tangible product such as apples or a service such as repair services, legal counsel, or entertainment.
In theory, in a free market the aggregates of quantity demanded by buyers and quantity supplied by sellers will be equal and reach economic equilibrium over time in reaction to price changes; in practice, various issues may prevent equilibrium, and any equilibrium reached may not necessarily be morally equitable. For example, if the supply of healthcare services is limited by external factors, the equilibrium price may be unaffordable for many who desire it but cannot pay for it.
Various market structures exist. In perfectly competitive markets, no participants are large enough to have the market power to set the price of a homogeneous product. In other words, every participant is a "price taker" as no participant influences the price of a product. In the real world, markets often experience imperfect competition.
Forms include monopoly, duopoly, oligopoly, monopolistic competition, monopsony, and oligopsony . Unlike perfect competition, imperfect competition invariably means market power is unequally distributed. Firms under imperfect competition have the potential to be "price makers", which means that, by holding a disproportionately high share of market power, they can influence the prices of their products.
Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being analysed does not affect other markets. This method of analysis is known as partial-equilibrium analysis . This method aggregates in only one market. General-equilibrium theory studies various markets and their behaviour. It aggregates across all markets. This method studies both changes in markets and their interactions leading towards equilibrium.
Production, cost, and efficiency
In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity or a service for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption vs. investment goods, public goods or private goods, and "guns" vs. "butter".
Opportunity cost refers to the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice". For example, if a baker uses a sack of flour to make pretzels one morning, then the baker cannot use either the flour or the morning to make bagels instead. Part of the cost of making pretzels is that neither the flour nor the morning are available any longer, for use in some other way. The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit .
Inputs used in the production process include such primary factors of production as labour services, capital, and land . Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car.
Economic efficiency describes how well a system generates desired output with a given set of inputs and available technology. Efficiency