Definition of Economics
Economic conditions are constantly changing, and each generation views its own economic problems in its own way. Economics is regarded as a social science because it uses scientific methods to generate theories that explain the behavior of individuals, groups, and organizations. Like all sciences, economic processes continuously evolve, leading to dynamic behavior influenced by both individuals and society as a whole. Consequently, economists believe that with modern practices and technological changes, the field of economics will never tend towards an equilibrium state.
Economics can be defined in several ways. Broadly, it is the study of scarcity—how individuals use resources and respond to incentives. Economic approaches aim to reconcile unlimited wants with limited resources by assessing the gap between supply and demand through understanding the production, distribution, and consumption of goods and services.
Economics vs. Finance vs. Accounting
Many people struggle to differentiate economics from accounting and finance. Finance involves the arrangement, investment, and management of funds, while accounting is the process of recording financial activities to generate decision-making data. Economics, however, has a broader scope, overseeing trends, triggers, and the general status of the economy. It includes government policies, national income, inflation, and unemployment, and focuses on the demand and supply aspects across society.
The 10 Principles of Economics
Despite its dynamic nature, economics is unified by ten principles that remain constant in the evolving field. These principles form the foundation of economic theory and guide economists:
- People Face Trade-offs
Decision-making always involves trading one thing for another. For example, a project manager must decide how to allocate time between projects, understanding that spending time on one means giving up time on the other. Societal trade-offs often occur between equity and efficiency, where government policies may sacrifice efficiency for equity, affecting overall productivity. - The Cost of Something
The cost of something is its “opportunity cost”—what you give up to get that item. For instance, cooking at home saves money but means sacrificing time that could be spent on other activities. - People Are Rational
Economists assume people are rational, making decisions by comparing marginal benefits with marginal costs. For example, a student studying an extra hour instead of watching TV makes a small adjustment to benefit from studying at the cost of leisure. - People Respond to Incentives
Incentives—both positive and negative—motivate people to change their behavior. For example, a bonus for extra work or higher taxes on fuel can influence people’s actions. - Trading Is Better
Trading often benefits all parties involved, allowing individuals to focus on their strengths and exchange goods or services to achieve better outcomes. - Markets Are Usually Good
Markets effectively organize economic activity by reflecting the value and cost of goods. Prices in the market help maximize societal welfare. - Governments Can Help
Government policies can improve market outcomes by promoting efficiency and equity, especially when markets fail to allocate resources effectively. - A Country’s Productivity
A nation’s standard of living depends on its productivity. Increasing productivity through better education and technology can enhance living standards. - Printing Too Much Money
Printing excessive money leads to inflation, raising prices and reducing the value of money. Policymakers aim to control inflation to maintain market stability. - Inflation and Unemployment
Historically, high inflation has been associated with lower unemployment. Increased money circulation stimulates demand, leading to more hiring and reduced unemployment.
