Economics

Economics is the social science studying production and consumption through measureable variables. It involves analysing the production, distribution and consumption of goods and services. Economics is said to be positive when it attempts to explain the consequences of different choices given a set of assumptions and normative when it prescribes that a certain action should be taken. The subject is broadly divided into two main branches: microeconomics, which deals with individual agents, such as households and businesses, and macroeconomics, which considers the economy as a whole (including inflation, unemployment, industrial production, and the role of government). Aspects receiving particular attention in economics are resource allocation, production, distribution, trade, and competition. Economics may in principle be, and increasingly is, applied to any problem that involves choice under scarcity or determining economic value. Economics has been referred to as "the dismal science". The term was coined by Thomas Carlyle, who favoured an economic system based on slavery, in rejection of the leading economists of the 1840s, who were typically opposed to slavery. Today, it is often used in reference to the emphasis on scarcity in economics.

Areas of study in economics

• Microeconomics, which examines the economic behaviour of individual actors such as businesses, households, and individuals, with a view to understand decision making in the face of scarcity and the allocation consequences of these decisions.
• Macroeconomics, which examines an economy as a whole with a view to understanding the interaction between economic aggregates such as national income, employment and inflation. Note that this is different from general equilibrium theory, which deals with aggregate problems from a strictly constructed microeconomic viewpoint.

Attempts to join these two branches or to refute the distinction between them have been important motivators in much of recent economic thought, especially in the late 1970s and early 1980s. Today, the consensus view is arguably that good macroeconomics has solid microeconomic foundations. In other words, its premises ought to have theoretical and evidential support in microeconomics. Economics can also be divided into numerous subdisciplines that do not always fit neatly into the macro-micro categorization. These subdisciplines include: international economics, labour economics, welfare economics, resource economics, environmental economics, managerial economics, financial economics, urban economics, development economics, and economic geography. There are also methodologies used by economists whose underlying theories are important.

• The most significant example may be econometrics, which applies statistical techniques to the study of economic data. Computational economics relies on mathematical methods, including econometrics.
• Another trend which is more recent, and closer to microeconomics, is to use social psychology concepts (behavioral economics) and methods (experimental economics).

Other subdivisions are possible. Finance has traditionally been considered a part of economics - as its body of results emerges naturally from microeconomics - but has today effectively established itself as a separate, though closely related, discipline. There has been an increasing trend for ideas and methods from economics to be applied in wider contexts. Since economic analysis focuses on decision making, it can be applied, with varying degrees of success, to any field where people are faced with alternatives - education, marriage, health, etc. Public choice theory studies how economic analysis can apply to those fields traditionally considered outside of economics. The areas of investigation in economics therefore overlap with other social sciences, including political science and sociology. The most prevalent political economy is loosely called capitalism.

Economic assumptions

-Supply and Demand

In microeconomic theory supply and demand attempts to describe, explain, and predict the price and quantity of goods sold in competitive markets. It is one of the most fundamental economic models, ubiquitously used as a basic building block in a wide range of more detailed economic models and theories. In general, the theory claims that where goods are traded in a market at a price where consumers demand more goods than businesses are prepared to supply, this shortage will tend to increase the price of the goods. Those consumers that are prepared to pay more will bid up the market price. Conversely, prices will tend to fall when the quantity supplied exceeds the quantity demanded. This price-quantity adjustment mechanism causes the market to approach an equilibrium point, a point at which there is no longer any impetus to change. This theoretical point of stability is defined as the point where producers are prepared to sell exactly the same quantity of goods as the consumers want to buy. The theory of supply and demand is important in the functioning of a market economy in that it explains the mechanism by which many decisions about resource allocation are made.

Price

In order to measure the ebb and flow of supply and demand, a measurable value is needed. The oldest and most commonly used is price, or the going rate of exchange between buyers and sellers in a market. Price theory, therefore, charts the movement of measurable quantities over time, and the relationship between price and other measurable variables. In Adam Smith's Wealth of Nations, this was the trade-off between price and convenience. A great deal of economic theory is based around prices and the theory of supply and demand. In economic theory, the most efficient form of communication comes about when changes to an economy occur through price, such as when too much supply leads to lower prices, and too much demand leads to higher prices.
In many practical economic models, some form of "price stickiness" is incorporated to model the fact that prices do not move fluidly in many markets. Economic policy often revolves around arguments about the cause of "economic friction", or price stickiness, and which is, therefore, preventing the supply and demand from reaching equilibrium.
Another area of economic controversy is about whether price measures value correctly. In mainstream market economics, where there are significant scarcities not factored into price, there is said to be an externalization of cost. Market economics predicts that scarce goods which are under-priced are over-consumed (See social cost). This leads into public goods theory.

Scarcity

Because scarcity and decision are central to economic theory, the question of what is the basic trade-off in economics is of central importance. In every economic theory, there is a basic exchange of two or more ultimately scarce commodities. For Adam Smith, this trade-off was defined as the trading of time, or convenience, for money. For example, a person could live near town, and pay more for rent of his home, or live farther away and pay less, "paying the difference out of his convenience". This view, that the primary trade-off involved in economics is between time and money, has several challengers. Each of these bases its view of scarcity on a different fundamental trade-off. A small number of economists prefer to define economics as the study of how and why people trade; this definition implies relative scarcity.

-Marginalism

In marginalist economic theory, the price level is determined by the marginal cost and marginal utility. The price of all goods will be the cost of making the last one that people will purchase, and the price of all the employees in a company will be the cost of hiring the last one the business needs. Marginalism looks at decisions based on "the margins", what the cost to produce the next unit is, versus how much it is expected to return in profit. When the marginal return of an action reaches zero, the action stops. Marginal utility is how much more happiness or use a person receives from a purchase in contrast with buying less. Marginal rewards are often subject to diminishing returns: Less reward is obtained from more production or consumption. For example, the 10th bar of chocolate that a person consumes does not taste as good as the first, and so brings less marginal utility. Marginalism became increasingly important in economic theory in the late 19th century, and is a tool which is used to analyze how economic systems will react. Marginal cost of production divides costs into "fixed" costs which must be paid regardless of how many of a commodity are produced, and "variable costs". The marginal cost is the variable cost of the last unit, plus the percentage of fixed costs. Marginalism states that when the profit from the next unit will be zero, that unit will not be produced. The marginalist theory of price level runs counter to the classical theory of price being determined by the amount of labour congealed in a commodity.

-Value

It could be argued that beneath an economic theory is a theory of value. Value can be defined as the underlying activity which economics describes and measures. It is what is "really" happening. Adam Smith defined "labour" as the underlying source of value, and "the labour theory of value" underlies the work of Karl Marx, David Ricardo and many other classical economists. The "labour theory of value" argues that a good or service is worth the labour that it takes to produce. For most, this value determines a commodity's price. This labor theory of price and the closely related cost-of-production theory of value dominates the work of most classical economists, but those theories are far from the only accepted basis for "value". For example, neoclassical economists and Austrian School economists prefer the marginal theory of value.
"Market theory" argues that there is no "value" separate from price, that the market incorporates all available information into price, and that so long as markets are open, that price and the value are one and the same. This theory rests on the idea of the "rational economic actor". This was originally asserted by Mill.
Another set of theories rest on the idea that there is a basic external scarcity, and that "value" represents the relationship to that basic scarcity. These theories include those based on economics being limited by energy or based on a "gold standard".
All of these value theories are used in current economic work.

• Accounting - Accountancy (British English) or accounting (American English) is the process of maintaining, auditing, and processing financial information for business purposes.
• Advertise - Generally speaking, advertising is the paid promotion of goods, services, companies and ideas by an identified sponsor. Marketers see advertising as part of an overall promotional strategy.
• Banking - The essential function of a bank is to provide services related to the storing of value and the extending of credit.
• Capitalism - Capitalism generally refers to a combination of economic practices that became institutionalized in Europe between the 16th and 19th centuries.
• Economics - Economics is the social science studying production and consumption through measureable variables.
• Electronic Commerce - Electronic commerce or e-commerce consists of the buying, selling, marketing, and servicing of products or services over computer networks.
• Entrepreneurship - Many "high-profile" entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business.
• Finance - Finance addresses the ways in which individuals, business entities and other organizations allocate and use monetary resources over time.
• Insurance - Insurance is the business of providing protection against financial aspects of risk, such as those to property, life, health and legal liability.
• Investment - Investment is a term with several closely related meanings in finance and economics.
• Real Estate - Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings.
• Small Businesses - A small business may be defined as a business with a small number of employees. The legal definition of "small" often varies by country and industry, but is generally under 100 employees.