Economics: Definition, principles, branches, Importances

Introduction

Once we know the English meaning of the word 'economics', its Greek root is oikonomia, which means the 'management of household affairs' in ancient Greek. The household has a health concern with the problem of scarcity. As we know from the point that human wants are unlimited whereas the means to satisfy those wants are limited. Today, the whole world has moved into a small 'global village' and we know the problems of villages. The countries have the same problems which a small village has, at a national level. This is why we can study economics as the problems of a large family, i.e. the household. And the most important aspect 'scarce resources with alternative uses' is present in economics at every level.

Another simple yet effective definition of economics is: "Economics is a science which studies the wealth-getting and wealth-using behavior of man." Now this definition is very comprehensive. A sum of all the above definitions is that economics is a study of man's activities to earn and satisfy his unlimited wants with the help of scarce means having alternative uses.

Thus, according to Lionel Robins, economics is a science that studies human behavior as a relationship between ends and scarce means that have alternative uses. This definition has introduced the basic term "scarce means" which is a fundamental one in the definition of economics.

Alfred Marshall said: "Economics is the study of human behavior in daily life; it is the study of how people earn their income and where they spend it." This definition is based on a human being. According to this definition, when a man wants to satisfy his wants, he does some economic activities, i.e. he produces a commodity. He will then sell that commodity or he will go to work somewhere. He will use that income to satisfy his wants. On the whole, economics, according to Marshall, studies the economic activities of man.

"According to Adam Smith, economics is an inquiry into the nature and causes of the wealth of nations. It is the study of wealth." Wealth is all the things that have a monetary value. let's not take much time on the history of economics and then proceed to the real definition, principles, importance, branches, and other main indicators of Economics.

Different scholars have defined economics in different ways. Below are some definitions:

Definition of Economics

Economics is a social science that studies how individuals, businesses, governments, and societies allocate limited resources to meet unlimited needs. Examines the production, distribution, and consumption of goods and services and the factors that influence financial decisions and outcomes.

The first component of the definition highlights resource scarcity. The first part of the definition states that "Economics is the study of how society manages its scarce resources." This is a fundamental fact of life: we live in a world of finite resources. Scarce resources mean that society must choose among alternative ways of producing goods. Allocation of time is included in this category. If you decide to spend your time taking a nap rather than going to your economics class, you have chosen to allocate your time in a different way than if you had gone to class. Assuming that you value your sleep as much as your economics class, the act of napping involves trading off one activity for another. In other words, sleeping has its opportunity costs. Resource scarcity forces society to confront trade-offs among different goals.
Adam Smith described the "invisible hand" which leads individuals to pursue their self-interest and contribute to the overall well-being of society as if they were led by an invisible hand. The contrast between Adam Smith's efficiency property and the first part of our definition reflects the two faces of economics.

Importance of Economics

Every policy that is issued by the ruler of a nation, either the policy is still a plan or the policy is already applied, it has an economic impact. It could even be a policy issued to solve an economic problem itself. Policies that are made can be a policy increase in fuel prices, policy changes tax system, and import restrictions on certain products, until a decision to go to war though. High fuel prices, changes in the taxation system, and import restrictions on certain products have a direct economic impact so it needs an analysis to measure the impact of the policy and formulation of the right policy to solve a problem with a minimal impact. As for the decision to go to war, because war needs a cost, then the decision is a decision based on an analysis of considering the use of resources for the purpose (in this case to win the war) compared with other uses of the resource that has a better result. All the analysis and policy formulation is a problem-solving pattern. By studying economics, we will be given the ability to think and analyze a variety of policies and programs and also the ability to make the right decisions and efficient alternatives because what is learned in economics is a science about how to allocate resources for the welfare of society.

Principles of Economics

The principles of economics are foundational concepts that form the basis of economic theory and analysis. These principles help economists and individuals understand how economic systems work, how decisions are made, and how resources are allocated. Here are some of the key principles of economics:

Scarcity: Resources are limited, but human wants and needs are unlimited. This principle highlights the fundamental problem that all societies face in allocating scarce resources efficiently to satisfy unlimited wants.

Opportunity Cost: Every decision involves trade-offs, where choosing one option means forgoing the benefits of another option. The opportunity cost of a decision is the value of the next best alternative that is sacrificed.

Marginal Analysis: Decisions are made by comparing the marginal benefits (additional benefits) and marginal costs (additional costs) of an action. Rational decision-makers will choose an action if the marginal benefits outweigh the marginal costs.

Supply and Demand: The law of supply states that as the price of a good or service increases, producers are willing to supply more of it, and vice versa. The law of demand states that as the price of a good or service increases, consumers are willing to buy less of it, and vice versa. The interaction of supply and demand determines market prices and quantities.

Elasticity: Elasticity measures the sensitivity of supply or demand to changes in price or income. Price elasticity of demand measures how much quantity demanded changes in response to a change in price, while income elasticity of demand measures how much quantity demanded changes in response to a change in income.

Cost-Benefit Analysis: Economic decisions are often evaluated using cost-benefit analysis, where the benefits of an action are compared to the costs associated with it. Rational decision-makers will undertake an action if the benefits outweigh the costs.

Market Efficiency: Markets tend to allocate resources efficiently when there is competition, information is freely available, property rights are protected, and there are minimal externalities (spillover effects on third parties).

Trade-offs: Choices involve trade-offs, where gaining something desirable often means sacrificing something else. Trade-offs are inherent in economic decision-making and resource allocation.

Incentives: Incentives play a crucial role in influencing human behavior. Positive incentives (rewards) encourage certain behaviors, while negative incentives (penalties) discourage them. Understanding incentives helps explain individual and market behavior.

Gains from Trade: Trade allows individuals and countries to specialize in producing goods and services where they have a comparative advantage (ability to produce at a lower opportunity cost). This specialization and trade can lead to mutual gains and increased overall welfare.

These principles are foundational to understanding economic concepts, analyzing economic issues, and making informed decisions in both individual and policy contexts.

Branches of Economics

Economics encompasses various branches and types that focus on different aspects of economic behavior, systems, and analysis. Economics is often divided into two main branches: microeconomics and macroeconomics.

Microeconomics: Microeconomics deals with the behavior of individual agents such as consumers, firms, and workers, as well as the markets they interact in. It examines how individuals make decisions regarding consumption, production, pricing, and resource allocation within specific markets. Microeconomics also explores topics such as supply and demand, elasticity, market structures (perfect competition, monopoly, oligopoly, monopolistic competition), and consumer behavior. Key topics in microeconomics include:

• Supply and Demand: The relationship between the quantity of a good or service supplied by producers and the quantity demanded by consumers, which determines market prices.
• Market Structures: Different types of market structures, such as perfect competition, monopoly, oligopoly, and monopolistic competition, and their implications for pricing, competition, and efficiency.
• Consumer Behavior: How individuals make decisions about consumption based on preferences, budget constraints, and utility maximization.
• Producer Behavior: How firms make decisions about production, pricing, investment, and resource allocation to maximize profits.
• Factor Markets: The markets for factors of production, such as labor (labor market) and capital (capital market), and the determination of wages, interest rates, and returns on investment.

Macroeconomics: Macroeconomics looks at the economy as a whole and focuses on aggregate measures such as national income, unemployment rates, inflation, economic growth, and overall price levels. It examines the factors influencing the performance of the entire economy, including government policies, monetary policy, fiscal policy, international trade, and economic fluctuations (business cycles). Key topics in macroeconomics include:

• Gross Domestic Product (GDP): The total value of all goods and services produced within a country's borders over a specific period, used as a measure of economic output and growth.
• Unemployment: The percentage of the labor force that is unemployed and actively seeking employment, reflecting the health of the labor market.
• Inflation: The rate at which the general price level of goods and services rises over time, affecting purchasing power and the cost of living.
• Fiscal Policy: Government policies related to taxation, spending, and budget deficits or surpluses, used to influence aggregate demand and economic activity.
• Monetary Policy: Central bank policies related to money supply, interest rates, and credit conditions, used to control inflation, promote growth, and stabilize the economy.
• International Trade: The exchange of goods, services, and capital between countries, including trade balances, exchange rates, tariffs, and trade agreements.

Other sub-branches of Economics

1. International Economics: International economics studies economic interactions between countries, including international trade, international finance, exchange rates, balance of payments, trade policies, globalization, and economic development. It analyzes how countries specialize in producing goods and services, engage in trade, and address issues related to trade imbalances, tariffs, quotas, and trade agreements.
2. Development Economics: Development economics focuses on the economic conditions, policies, and challenges faced by developing countries. It examines issues such as poverty, inequality, economic growth, industrialization, infrastructure development, education, healthcare, foreign aid, and sustainable development. Development economists study strategies to promote economic progress and improve living standards in less developed regions.
3. Labor Economics: Labor economics explores the behavior of workers, employers, and labor markets. It examines factors affecting wages, employment levels, job mobility, labor unions, human capital investment, discrimination, labor market regulations, and the impact of technological advancements on jobs and skills.
4. Environmental Economics: Environmental economics examines the relationship between economic activities and environmental sustainability. It addresses issues such as pollution, natural resource depletion, climate change, biodiversity loss, renewable energy, environmental regulations, market-based environmental policies (such as carbon pricing), and the valuation of environmental goods and services.
5. Health Economics: Health economics focuses on the allocation of healthcare resources, healthcare systems, healthcare financing, healthcare policies, healthcare outcomes, healthcare costs, insurance markets, healthcare access, and the economic analysis of healthcare interventions and technologies.
6. Public Economics: Public economics studies the role of government in the economy, including public expenditures, taxation, public goods, social welfare programs, public infrastructure, government regulations, fiscal policy, public debt, and income distribution. It examines how government policies impact economic efficiency, equity, and social welfare.

These are some of the major types of economics, each offering unique insights into different aspects of economic behavior, decision-making, and policy analysis.

The main Economic Indicators

Economic indicators are statistical measures used to assess the overall health and performance of an economy. They provide valuable insights into key aspects of economic activity, such as growth, employment, inflation, trade, and consumer sentiment. Here are some of the main economic indicators commonly used by economists, policymakers, businesses, and investors:

Gross Domestic Product (GDP): GDP is the total value of all goods and services produced within a country's borders over a specific period, usually measured quarterly or annually. It is a broad measure of economic output and is used to gauge the overall size and growth of an economy.

Unemployment Rate: The unemployment rate measures the percentage of the labor force that is actively seeking employment but is currently unemployed. It provides insights into the health of the labor market and the availability of job opportunities.

Inflation Rate: The inflation rate measures the percentage increase in the general price level of goods and services over time. It is a key indicator of changes in purchasing power and is used to monitor price stability within an economy.

Consumer Price Index (CPI): The Consumer Price Index measures changes in prices of the basket of goods and services most frequently purchased by households. It is used to track inflation and measure customers' cost of living.

Producer Price Index (PPI): The PPI measures changes in the prices received by producers for goods and services. It provides insights into inflationary pressures at the producer level and can impact consumer prices.

Interest Rates: Interest rates, such as the central bank's policy rate (e.g., the Federal Funds Rate in the United States), influence borrowing costs, investment decisions, and consumer spending. Changes in interest rates can affect economic activity, inflation, and financial markets.

Trade Balance: The trade balance measures the difference between a country's exports and imports of goods and services. A positive trade balance (surplus) occurs when exports exceed imports, while a negative trade balance (deficit) occurs when imports exceed exports. It provides insights into a country's international trade relationships and competitiveness.

Consumer Confidence Index (CCI): The CCI measures consumer sentiment and expectations regarding the economy's future performance. It reflects consumer attitudes towards spending, saving, and economic conditions, influencing consumer behavior and economic activity.

Business Confidence Index (BCI): Similar to the CCI, the BCI measures business sentiment and expectations regarding economic conditions, investment opportunities, and business prospects. It provides insights into business decisions, investment plans, and economic growth prospects.

Housing Market Indicators: These include indicators such as home sales, housing starts, and home prices. They provide insights into the health of the real estate market, housing affordability, construction activity, and consumer wealth.

These economic indicators are essential for monitoring economic trends, making informed policy decisions, assessing investment opportunities, and understanding the overall performance of an economy.

Conclusion

In conclusion, the study of economics offers a comprehensive framework for understanding how individuals, businesses, governments, and societies make decisions about resource allocation and address economic challenges. Throughout this course, we have explored various key concepts, principles, and types of economics that form the foundation of economic analysis and policy-making.

Author: DonaldMasimbi