Do you ever wonder,
Why are some countries rich and some countries poor?
How can data help us understand the world?
Why do women earn less than men?
Why we need the information to help us make better decisions?
What causes a recession?
Economics can help us answer all these and many more such questions. In this lesson, we will try to understand what is economics and how it applies to our everyday life.
If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services, and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Time is the ultimate scarce resource - everyone has 24 hours in a day. At any point in time, there is only a finite amount of resources available.
At its core, economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions, work decisions, or societal decisions. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources.
One of the earliest recorded economic thinkers was the 8th-century B.C. Greek farmer/poet Hesiod, who wrote that labor, materials, and time needed to be allocated efficiently to overcome scarcity. But the founding of modern Western economics occurred much later, generally credited to the publication of Scottish philosopher Adam Smith's 1776 book, An Inquiry Into the Nature and Causes of the Wealth of Nations
Economics focuses on the actions of human beings, based on assumptions that humans act with rational behavior, seeking the most optimal level of benefit or utility. The principle (and problem) of economics is that human beings have unlimited wants and occupy a world of limited means. For this reason, the concepts of efficiency and productivity are held paramount by economists. Increased productivity and more efficient use of resources, they argue, could lead to a higher standard of living.
Economics is concerned with the production, distribution, and consumption of goods and services. It often involves topics like wealth and finance, but it's not all about money. When applied to agricultural and environmental issues, economics is concerned with the efficient allocation of natural resources to maximize the welfare of society.
Classical economics
It flourished primarily in Britain in the late 18th to the mid-19th century. Adam Smith, Jean-Baptiste Say, David Ricardo, and John Stuart Mill are considered to be the main thinkers of classical economics. According to classical economics, market economies are largely self-regulating systems, governed by natural laws of production and exchange. Adam Smith's The Wealth of Nations in 1776 is considered to mark the beginning of classical economics. The fundamental message in Smith's book was that the wealth of any nation was determined not by the gold in the monarch's coffers, but by its national income. This income was in turn based on the labor of its inhabitants, organized efficiently by the division of labor and the use of accumulated capital, which became one of the central concepts of classical economics.
Marxian economics
Marxian economics is a school of economic thought based on the work of 19th-century economist and philosopher Karl Marx. Marx claimed there are two major flaws in capitalism that lead to exploitation: the chaotic nature of the free market and surplus labor. He argued that the specialization of the labor force, coupled with a growing population, pushes wages down, adding that the value placed on goods and services does not accurately account for the true cost of labor. Eventually, he predicted that capitalism will lead more people to get relegated to worker status, sparking a revolution and production being turned over to the state.
Neoclassical economics
This approach was developed in the late 19th century based on books by William Stanley Jevons, Carl Menger, and Leon Walras.
Classical economists assume that the most important factor in a product's price is its cost of production. Neoclassical economists argue that utility to consumers, not the cost of production, is the most important factor in determining the value of a product or service. They call the difference between actual production costs and retail price, 'economic surplus'. Neoclassical economists believe that a consumer's first concern is to maximize personal satisfaction. Therefore, making purchasing decisions based on their evaluations of the utility of a product or service. This theory coincides with rational behavior theory, which states that people act rationally when making economic decisions.
Further, neoclassical economics stipulates that a product or service often has value above and beyond its production costs. While classical economic theory assumes that a product's value derives from the cost of materials plus the cost of labor, neoclassical economists say that consumer perceptions of the value of a product affect its price and demand.
Keynesian economics
This is a theory of total spending in the economy and its effect on output, employment and inflation. It was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynesian economics is considered a demand-side theory that focuses on changes in the economy over the short run. Based on his theory, Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression. Keynesian economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions. Activist fiscal and monetary policy are the primary tools recommended by Keynesian economists to manage the economy and fight unemployment.
There are two major types of economics
Applied economics is the term used to describe how economic theories can be applied to real world situations. This looks at everything from costs and benefits to predict human behavior to make an informed decision.
Economic indicators are key stats about the economy that can help you better understand where the economy is headed.
Economic indicators can be classified into three categories according to their 'timing' and 'direction'.
Economic indicators according to timing
Leading indicators point to future changes in the economy. They are extremely useful for short-term predictions of economic developments because they usually change before the economy changes. For example, stock market,
Lagging indicators usually come after the economy changes. They are generally most helpful when used to confirm specific patterns. You can make economic predictions based on the patterns, but lagging indicators cannot be used to directly predict economic change. For example, gross domestic product (GDP), unemployment, consumer price index (CPI), interest rates, currency strength,
Coincident indicators provide valuable information about the current state of the economy within a particular area because they happen at the same time as the changes they signal. For example, industrial production
Economic indicators according to direction
Procyclical indicators move in the same direction as the general economy; they increase when the economy is doing well, decrease when it is doing badly. For example, gross domestic product (GDP)
Countrecyclical indicators move in the opposite direction to the general economy; in the short run they rise when the economy is deteriorating. For example, unemployment rate
Acyclical indicators are those with little or no correlation to the business cycle: they may rise or fall when the general economy is doing well and may rise or fall when it is not doing well.
