What Is Economics?
Economists study how decisions are made. Examples of economic decisions include whether you should buy or lease a car, sublet your apartment, or buy that Gibson guitar you’ve been eyeing. And just as individuals must choose what to buy within the limits of their income, society as a whole must determine what to produce from its limited set of resources.
Of course, life would be a lot easier if we could have whatever we wanted whenever we wanted it. Unfortunately, life does not work that way. Our wants and needs are practically unlimited, but the resources available to satisfy these wants and needs are always limited. The term used to describe the limited nature of society’s resources is scarcity.
Even the most abundant resources, like the water we drink and the air we breathe, are not always abundant enough everywhere to meet the wants and needs of every person. So how do individuals and societies make decisions about scarce resources? This is the basic question economists seek to answer. Economics is the study of how individuals and societies allocate their limited resources to satisfy their practically unlimited wants.
Microeconomics and Macroeconomics
The study of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomics (micro) is the study of the individual units that make up the economy, such as households and businesses. Macroeconomics (macro) is the study of the overall aspects and workings of an economy, such as inflation (an overall increase in prices), growth, employment, interest rates, and the productivity of the economy. To understand the difference, consider a worker who gets laid off and becomes unemployed. Is this an issue that would be addressed in microeconomics or macroeconomics? The question seems to fit parts of both definitions. The worker is an individual, which is micro, but employment is one of the broad areas of concern for the economy as a whole, which is macro. However, because only one worker is laid off, this is a micro issue. When many workers are laid off, the result is a higher unemployment rate across the entire economy. Then the issue is broad enough to be studied by macroeconomists. However, macroeconomics is more than just an aggregation of microeconomics. Macroeconomists examine, among other things, government policies regarding the federal budget and money supply, the reasons for inflation and unemployment, economic growth, international trade, and government borrowing—topics that are too complex to be understood using only microeconomic analysis.
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A droplet causes a ripple effect on the surface of water.
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Five diamonds.
Glossary
- Scarcity
- Scarcity refers to the inherently limited nature of society’s resources, given society’s unlimited wants and needs.
- Economics
- Economics is the study of how individuals and societies allocate their limited resources to satisfy their practically unlimited wants.
- Microeconomics
- Microeconomics is the study of the individual units that make up the economy.
- Macroeconomics
- Macroeconomics is the study of the overall aspects and workings of an economy.