Economics is the study of how the productive and distributive aspects of human life are organized. Production includes the activities that result in the goods and services that satisfy people's needs and wants. Distribution includes the ways society makes goods and services available to people. We refer to these social arrangements as the economy or the economic system, and this is broadly speaking the focus of economics.
Economic systems are fundamentally relationships among economic actors such as employer and worker, or consumer and seller. A common way of characterizing the tasks of any economic system is to refer to a set of economic decisions every society must make: what goods and services are to be produced or provided; how are these goods and services to be produced or provided; and who is to receive the goods and services? Economics, defined from this perspective is the study of how societies answer the what, how, and for whom questions.
The purpose of economics is to understand how an economic system works, to assess its strengths and weaknesses, and to resolve economic problems. According to one economics text, a list of the key elements of economics includes the following:
- Practicing a reasoned approach to economic phenomena
- Mastering basic economic concepts
- Possessing an overview of the economy
- Identifying important economic issues
- Applying the concepts to particular issues
- Reaching reasoned decisions on economic issues
The practice of economics includes several different reasoned approaches to the study of economic phenomena which contributes to the intellectual excitement of studying economics. Each approach represents a particular economic perspective or "school" of economic thought. Economists are not unanimous about what are the most essential aspects of the economy to focus on. For example, in the U.S. economy markets and market behavior (buying and selling) are considered central by many economists to any understanding of the economy and economic behavior. To the extent that this is true, then understanding how markets work (supply and demand), understanding market behavior and how individuals and businesses make economic choices becomes critical to understanding how such an economic system works.
Other economists, however, view power or the hierarchical aspect of economic relationships as central to an understanding of an economic system and economic behavior. For example, in the U.S. economy work is primarily organized for profit and the business owner or his/her appointed manager is the boss at the workplace. To the extent that the economy is organized hierarchically, then understanding the nature of these economic power relationships(which groups have power and which do not), and understanding how power influences economic outcomes for different groups becomes critical to understanding how such an economic system works.
To the extent that these two very different perspectives focus on unrelated things (markets and power) they can be considered complementary. To the extent that they are overlapping they are competing explanations. Take the issue of wage determination, are wages the result of the impersonal market forces of supply and demand, or are wages the result of relative bargaining power of workers versus employers? Economists do not always agree with each other and this adds an exciting element of intellectual debate and controversy to the study of economics.
Economists try to resolve disagreements by appealing to the logic of their theories or to the explanatory power of their theories, and through the use of empirical data in support of their theories. Economists rely on different methods or ways of approaching the study of economics. The most common way is to develop simplified (when compared to the complexity of the real world) models, or theories. Such models can be highly mathematical ones that employ geometry, algebra and calculus, while others can be more qualitative expressed in narrative form. Most economists rely on deductive reasoning to construct their models, a few use inductive reasoning.
To evaluate an economic system, economists apply certain evaluative criteria or standards by which to evaluate economic performance. The most common standard applied by economists is efficiency. For example, how efficiently does our economic system use its scarce resources? Other criteria might include: equity (are economic outcomes fair?); freedom (are individuals free to make their own economic decisions?); or even democracy (do people get to participate in economic decisions that affect their lives?). Our choice of the standards used to evaluate an economic system are always based on a value judgment of what ought to be as opposed to the more objective question of what is.
In the end, however, no matter what economic perspective, method, or evaluative criteria are chosen, economic theory and tools of analysis can be and are used to understand and inform individual, business, government, or other organizational decision-making. The application of economic theories to decision-making makes economics a versatile and valuable tool for both understanding the economy and informing the kinds of economic decisions people actually make.
