What Is Economics?

What is economics?

Economics is a social science that studies financial choices and outcomes, such as how people and countries use resources. Those who study economics analyze the production, distribution, and consumption of various services and goods. 

In general, the goal of economics is to learn more about the choices people make to get what they want. 

Microeconomics vs. macroeconomics

There are two primary economic segments: microeconomics and macroeconomics. Both microeconomics and macroeconomics provide logical ways to review problems and formulate solutions.

What is microeconomics?

Microeconomics focuses on individual financial health. It delves into personal concerns like income, consumer habits, credit, savings and investments. For example, microeconomics may examine how an individual or family uses their available resources, taking into account their income, consumer spending, saving habits, credit products and investments. 

In other words, microeconomics looks at smaller and more specific issues in an economy. Professionals in the microeconomics field might study the way families decide how to spend their money or how individual businesses operate.

What is macroeconomics?

Macroeconomics looks at the economy on a larger scale, examining factors that impact an entire economy, such as inflation, price levels, unemployment, economic growth and economic decline. Macroeconomics uses a broader lens to examine a country’s bigger picture. 

Macroeconomics analyzes the production, consumption and distribution of resources. It also encompasses saving rates, investments, employment and the public policies that affect it all. 

Macroeconomics issues someone might study include the factors that influence a country’s wealth, gross domestic product (GDP), trade imbalances and negotiations. Someone in the macroeconomics field may also look at a country’s fiscal policy, and the reasons why countries enter a recession or a depression.

While individuals make microeconomic choices when they buy something, save or borrow money and invest for the future, macroeconomics affects these choices via inflation, interest rates and the job market. Understanding macro can help you make the best microdecisions. [Related article: 5 Tips for Negotiating a Business Loan] 

Economics is about choices and decisions, not just money

Though economics is widely associated with money, it also involves weighing different choices or alternatives – many of which do not involve monetary issues, according to the Library of Economics and Liberty (Econlib). 

The organization notes that the decisions you make every day can be considered economic choices. For example, should you spend an hour a week volunteering for a worthy charity or send money to that charity? Should you take a job to help support relatives or save for your future? [Related article: Techniques and Tools to Help You Make Business Decisions]

In his 1932 book An Essay on the Nature and Significance of Economic Science, former London School of Economics professor Lionel Robbins features an all-encompassing economics definition that is still used today: “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses.” Robbins’ words encompass economics as a study about much more than money.

What are some examples of economics?

Two of the most crucial economic applications are the stock market and trade deals.  

• Stock market: One of the most significant examples of economics at work is the stock market, where investors can buy and sell shares of publicly traded companies. Stock market trading affects individuals and countries, so both microeconomics and macroeconomics are involved. Nearly every developed country in the world has stock markets. An economist studies the markets to understand what is influencing stock market fluctuations. 
• Trade deals: A key example of macroeconomics comes in the form of trade deals. When countries negotiate trade deals, they discuss import and export laws, tariffs and taxes. All of these macroeconomic considerations influence those countries’ citizens in a microeconomic way. [Learn more about small business taxes.]

Why do we study economics?

Economics is particularly relevant because it examines and studies some of the most critical resources on earth, including soil, lumber, raw materials, fish, minerals, coal and oil.  

Because resources can be limited – and some are scarce – how they’re distributed and used is crucial to understand. Access to these resources impacts the well-being of everyone, making economics one of the most impactful of the social sciences. 

Who are some famous economists?

The list of influential economists is long, but it generally starts with the Scottish philosopher Adam Smith. Smith is widely hailed as the father of economics because of his pivotal book, The Wealth of Nations, published in 1776.

One of the most famous economists in recent times is Stanford University’s Kenneth Arrow. In 1972, Arrow was awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for “pioneering contributions to general equilibrium theory and welfare theory,” according to the Econlib. Arrow’s work on the economics of uncertainty remains an authoritative source for other economists.

American statistician Milton Friedman received the 1976 Nobel Memorial Prize in economic sciences for his research on consumption analysis, monetary history and theory, and stabilization policy.

Other famous historical economists include David Ricardo, Thomas Malthus, John Stuart Mill, Karl Marx, Alfred Marshall, John Keynes and Irving Fisher.

Chad Brooks contributed to the writing and research in this article.