What Is Economics?

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Simply, and perhaps surprisingly put, economics is the study of scarcity. Resources are limited, and every society wants to figure out how to allocate its resources for maximum benefit. The field of economics serves in large part to help answer this resource allocation question, or at least to describe how players in the economy solve the resource allocation problem for themselves. As such, economists study topics such as:

  • How prices and quantities of items are determined in market economies
  • How much value markets create for society
  • How taxes and regulation affect economic value
  • Why some goods and services are under-supplied in a market economy
  • How firms compete and maximize profit
  • How households decide what to consume, how much to save, and how much to work (or, more generally, how people respond to incentives)
  • How to measure the size of an economy
  • Why some economies grow faster than others
  • What effect monetary and fiscal policy has on economic well-being
  • How interest rates are determined

In order to fully understand what economics is, it’s important to also understand a bit about what economics isn’t. For example, economics and finance are related but separate fields, and it’s not an economist’s job to tell people what stocks and bonds they should be investing in.  In a similar fashion, many of the topics discussed in The Economist deal with politics and current events and are not specifically economic-related, despite the title of the publication.

 But there is a subfield of economics known as political economy!

It is, on the other hand, an economist’s job to understand the relationship between interest rates and bond prices. In addition, financial economists to try to examine stock market behavior in order to determine whether prices are rational and mats are efficient.

Understanding what economists do and don’t study is important since sometimes economists are called on to answer questions that they are not technically qualified to analyze, and this can have unsatisfactory results.  For example, while economists cannot tell policymakers what is best on the grounds of fairness, they can identify the policy outcome that is economically efficient and try to quantify the tradeoff between economic efficiency and fairness.

It's also helpful to keep in mind that there are many subfields within economics.  For example, industrial organization investigates various models of imperfect competition and tries to understand how firms act strategically with one another.  Behavioral economics aims to document the ways in which people incorporate human psychology into their decision making, causing them to deviate from the assumptions of economic rationality.  The field of econometrics develops mathematical data analysis tools that can then be used to answer questions in all of the other fields of economics.  Regardless of specific field, however, economists generally examine various ways in which firms and individuals manage the problem of scarcity in order to maximize their well-being.