Economics
From Tradexicon
Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold)."
A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
Areas of economics may be divided or classified in various ways, including:
- microeconomics and macroeconomics
- positive economics ("what is") and normative economics ("what ought to be")
- mainstream economics and heterodox economics
- fields and broader categories within economics.
One of the uses of economics is to explain how economies work and what the relations are between economic players (agents) in the larger society. Methods of economic analysis have been increasingly applied to fields that involve people (officials included) making choices in a social context, such as crime [3], education [4], the family, health, law, politics, religion [5], social institutions, and war.
[edit] In the beginning
Although discussions about production and distribution have a long history, economics in its modern sense is conventionally dated from the publication of Adam Smith's The Wealth of Nations in 1776. In this work Smith defines the subject in practical terms:
Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or product for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.
Smith referred to the subject as 'political economy', but that term was gradually replaced in general usage by 'economics' after 1870.
[edit] Areas of economics
Areas of economics may be classified in various ways, but an economy is usually analyzed by use of microeconomics or macroeconomics.
[edit] Microeconomics
Microeconomics examines the economic behavior of agents (including individuals and firms) and their interactions through individual markets, given scarcity and government regulation. Within microeconomics, general equilibrium theory aggregates across all markets, including their movements and interactions toward equilibrium. Partial equilibrium is concerned with interactions in one market, taking prices from other markets as given. Other fields in microeconomics, such as game theory or industrial organization, deal with strategic interactions, (i.e. where each agent takes into account the actions of other agents).
[edit] Macroeconomics
Macroeconomics examines the economy as a whole "top down" to explain broad aggregates and their interactions. Such aggregates include national income and output, the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy. Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition.[2] This has addressed a long-standing concern about inconsistent developments of the same subject.[3] Analysis also considers factors affecting the long-term level and growth of national income within a country and across countries.
[edit] Related fields, other distinctions, and classifications
Recent developments closer to microeconomics include behavioral economics and experimental economics. Fields bordering on other social sciences include economic geography, economic history, public choice, cultural economics, and institutional economics.
Another division of the subject distinguishes two types of economics. Positive economics ("what is") seeks to explain economic phenomena or behavior. Normative economics ("what ought to be," often as to public policy) prioritizes choices and actions by some set of criteria; such priorities reflect value judgments, including selection of the criteria.
Another distinction is between mainstream economics and heterodox economics. One broad characterization describes mainstream economics as dealing with the "rationality-individualism-equilibrium nexus" and heterodox economics as defined by a "institutions-history-social structure nexus."
The JEL classification codes of the Journal of Economic Literature provide a comprehensive, detailed way of classifying and searching for economics articles by subject matter. An alternative classification of often-detailed entries by mutually-exclusive categories and subcategories is The New Palgrave: A Dictionary of Economics (1987).
[edit] Mathematical and quantitative methods
Economics as an academic subject often uses geometric methods, in addition to literary methods. Other general mathematical and quantitative methods are also often used for rigorous analysis of the economy or areas within economics. Such methods include the following.
[edit] Mathematical economics
Mathematical economics refers to application of mathematical methods to represent economic theory or analyze problems posed in economics. It uses such methods as calculus and matrix algebra. Expositors cite its advantage in allowing formulation and derivation of key relationships in an economic model with clarity, generality, rigor, and simplicity.[6] For example, Paul Samuelson's book Foundations of Economic Analysis (1947) identifies a common mathematical structure across multiple fields in the subject.
[edit] Econometrics
Econometrics applies mathematical and statistical methods to analyze data related to economic models. For example, a theory may hypothesize that a person with more education will on average earn more income than person with less education holding everything else equal. Econometric estimates can estimate the magnitude and statistical significance of the relation. Econometrics can be used to draw quantitative generalizations. These include testing or refining a theory, describing the relation of past variables, and forecasting future variables.
[edit] National accounting
National accounting is a method for summarizing economic activity of a nation. The national accounts are double-entry accounting systems that provide detailed underlying measures of such information. These include the national income and product accounts (NIPA), which provide estimates for the money value of output and income per year or quarter. NIPA allows for tracking the performance of an economy and its components through business cycles or over longer periods. Price data may permit distinguishing nominal from real amounts, that is, correcting money totals for price changes over time.[8][9] The national accounts also include measurement of the capital stock, wealth of a nation, and international capital flows.
[edit] Selected fields
[edit] Development economics
Development economics examines the economic aspects of the development process in developing countries with a focus on methods of promoting economic growth. Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans.
[edit] Environmental economics
Environmental economics is concerned with issues related to degradation, enhancement, or preservation of the environment. In particular, public bads from production or consumption, such as air pollution, can lead to market failure. The subject considers how public policy can be used to correct such failures. Policy options include regulations that reflect cost-benefit analysis or market solutions that change incentives, such as emission fees or redefinition of property rights.
[edit] Financial economics
Financial economics, often simply referred to as finance, is concerned with the allocation of financial resources in an uncertain (or risky) environment. Thus, its focus is on the operation of financial markets, the pricing of financial instruments, and the financial structure of companies.
[edit] Game theory
Game theory is a branch of applied mathematics that studies strategic interactions between agents. In strategic games, agents choose strategies that will maximize their payoff, given the strategies the other agents choose. It provides a formal modeling approach to social situations in which decision makers interact with other agents. Game theory generalizes maximization approaches developed to analyze markets such as the supply and demand model. The field dates from the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. It has found significant applications in many areas outside economics as usually construed, including formulation of nuclear strategies, ethics, political science, and evolutionary theory.
[edit] Industrial organization
Industrial organization studies the strategic behavior of firms, the structure of markets and their interactions. The common market structures studied include perfect competition, monopolistic competition, various forms of oligopoly, and monopoly.
[edit] Information economics
Information economics examines how information (or a lack of it) affects economic decision-making. An important focus is the concept of information asymmetry, where one party has more or better information than the other. The existence of information asymmetry gives rise to problems such as moral hazard, and adverse selection, studied in contract theory. The economics of information has relevance in many fields, including finance, insurance, contract law, and decision-making under risk and uncertainty.
[edit] International economics
International trade studies the determinants of the flow of goods and services across international boundaries. International finance is a macroeconomic field which examines the flow of capital across international borders, and the effects of these movements on exchange rates. Increased trade in goods, services and capital between countries is a major effect of contemporary globalization.
[edit] Labour economics
Labour economics seeks to understand the functioning of the market and dynamics for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting patterns of wages and other labour income and of employment and unemployment, Practical uses include assisting the formulation of full employment of policies.[17]
[edit] Law and economics
Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of laws, to assess which legal rules are economically efficient, and to predict what the legal rules will be.[18][19] A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities.[20]
[edit] Political Economics
Political economics as a sub-field of economics, relates to the application of economic tools to the study of political systems, and the economic effects of different political systems. Political economics applies tools from such fields as game theory and public choice theory to incorporate political and economic choices into a coherent model.
[edit] Public finance
Public finance is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programs, effects on economic efficiency and income distribution of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of public choice theory, models public-sector behavior analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.
[edit] Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society.
[edit] References
- Frontiers in Economics - ed. K. F. Zimmermann, Springer-Science, 2002. - A summary of surveys on different areas in economics.
- The Autistic Economist - Yale Economic Review - How and why the dismal science embraces theory over reality.
- Nature of Things by Jean-Baptiste Say - an essay in which Say claims that economics is not an ethical system that one can simply refute on the basis that one does not accept its values: it is a collection of theories and models that explain inductively found principles.
- Wikipedia.
