ECON 110.docx - ECONOMICS What is Economics? Simply, and...

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ECONOMICSWhat is Economics?Simply, and perhaps surprisingly put, economics is the study of scarcity. Resources arelimited, and every society wants to figure out how to allocate its resources for maximumbenefit. The field of economics serves in large part to help answer this resource allocationquestion. Economists study topics such as:How prices and quantities of items are determined in market economiesHow much value markets create for societyHow taxes and regulation affect economic valueWhy some goods and services are under-supplied in a market economyHow firms compete and maximize profitHow households decide what to consume, how much to save, and how much towork (or, more generally, how people respond to incentives)Why some economies grow faster than othersWhat effect monetary and fiscal policy has on economic well-beingHow interest rates are determinedIn order to fully understand what economics is, it’s important to also understand a bitabout what economics isn’t. For example, economics and finance are related but separatefields, and it’s not an economist’s job to tell people what stocks and bonds they should beinvesting in.It is, on the other hand, an economist’s job to understand the relationship between interestrates and bond prices. In a similar fashion, many of the topics discussed in TheEconomist deal with politics and current events and are not specifically economic-related,despite the title of the publication.Understanding what economists do and don’t study is important, since sometimeseconomists are called on to answer questions that they are not technically qualified toanalyze, and this can have unsatisfactory results.Microeconomics versus MacroeconomicsAccording to comedian P.J. O’Rourke, “microeconomics concerns things that economistsare specifically wrong about, while macroeconomics concerns things economists arewrong about generally. Or to be more technical, microeconomics is about money youdon’t have, and macroeconomics is about money the government is out of.” This isprobably closer to the truth than economists would like, but let’s examine the distinctionin more detail.MicroeconomicsIn Latin the prefix “micro-“ means “small,” so it shouldn’t be surprising thatmicroeconomics is the study of small economic units. The field of microeconomics isconcerned with things like:Consumer decision making and utility maximizationFirm production and profit maximizationIndividual market equilibriumEffects of government regulation on individual markets Externalities and othermarket side effects1
MacroeconomicsMacroeconomics can be thought of as the “big picture” version of economics. Ratherthan analyzing individual markets, macroeconomics focuses on aggregate production andconsumption in an economy. Some topics that macroeconomists study are:The effects of general taxes such as income and sales taxes on output and pricesThe causes of economic upswings and downturns

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