Economics is a social science, like history, communications, or psychology. For the most part their concern is with humans and how they interact with each other. Those that study economics can cover a wide range of specialties. From Steven Levitt’s fascination with the implications of naming your child “Shatisha” to Ben Bernanke’s current problems of repairing the financial stability of this country. In essence though, economics is the study of the creation and use of goods and services, or more simply: commerce. That is a broad definition, but it is a broad science.
Economics was born right along commerce. As long as people have relied on one another for goods and services, there have been people who studied these interactions. Though they were never called economists because it wasn’t until the world started working together for the greater good did the need for countries to study commerce arise. Like all good sciences, it was born from another science. Modern economics is largely traced back to British philosopher Adam Smith’s The Wealth of Nations published (ironically) in 1776. Prior to him, philosophers like Aristotle and Thomas Aquinas played with the ideas of money, wealth, and commerce. It was Smith’s book though that really made it into a legitimate science.
While the history of economics is as fascinating as economics itself, those are subjects best reserved for another time. Basic economics does rely on a few principles, of which the science can be built on; like biology’s reliance of all living things being made up of cells.
Here are some ideas that allow economists to build upon and further the science. We’ll start with one most of us are familiar with:
Supply and Demand
Supply and demand is perhaps the most simple of economic ideas. If the supply for a certain product or service is limited, then demand is high. The flip-side would be that an enormous supply of a product or service would result in limited demand, relatively speaking. This isn’t simply a numbers game, but one of proportions. Say you have 20 widgets to sell and 100 people that want to buy them. Only one in five of them will get a widget, so demand for these widgets will be high. Following this principle, the seller of the widgets could price them high enough that only 20 people would be willing to buy them. Now instead imagine you have 200 widgets, and the same 100 people want to buy them. You’ll sell 100 at whatever price the buyers are willing to pay, but then you are stuck with 100 more unsold. You must either live with them or price the widgets so low you find another 100 buys, this likely results in selling them at a loss.
S = Supply, D = Demand, Duh
Supply and demand doesn’t always apply in every circumstance, which is perfectly fine to economists because it gives them something else to study. But of course the rule applies in almost all areas of commerce.
Opportunity Cost
The opportunity cost of a product or service is similar to the actual cost of it, but you’re adding in something else as well. The addition that makes it the opportunity cost is the cost of what you give up by doing one thing over another. You no doubt want an example, which I’m happy to provide. Say you wanted to take a day off work to go skiing, but you’re out of vacation does so you’re going to miss out on some income. The total cost of the ski trip is $100. By not working though, you’re missing out on $250 in income. The opportunity cost of going skiing is $350, because the net economic effect of you missing work to go skiing is costing you $350 in real money and potential income.
Efficiency
This doesn’t require a definition, and like economics, it has many. Economics is concerned with efficiency in a variety of manners. One application would be maximizing efficiency of the production of vehicles. That is to say producing a vehicle for the lowest possible cost without sacrificing other qualities, like reliability or the aesthetics of the vehicle. Sometimes efficiency is used to make assumptions. The Efficient Market Hypothesis is a term used in finance that assumes all stock prices currently reflect all known information, and everyone has access to this information. If you are a believer in index funds, much of what you are doing is assuming the market is naturally efficient.
What I’ve described above are some of the basic principles of economics. However some economists are instead focused on the world view of economies. These folks are known as Macroeconomics, whereas those only focused on a specific subject would be called Microeconomics. I’ve got classes reserved to debate these two camps so that will wait for another time. The macroeconomics that study commerce as it relates to a population (usually a country) are more concerned with the events that shape an entire economy. Here are some subjects that interest them:
Growth
We all know about GDP, or Gross Domestic Product. This is fundamentally the measurement of the economic output of a country. The measurement is often presented as a measurement of growth over the previous period. GDP was up 2% would mean the economy grew 2% over the last time it was measured.
Fiscal & Monetary Policy
A branch of political research that focuses on how a government raises and spends money. Fiscal policy is a method of economic control used frequently within the confines of the legislative branch. Fiscal policy revolves around the taxation of citizens, and the decisions of where money raised should be spent. A stimulus package is very much a reflection of fiscal policy Monetary policy is most often implemented by the Federal Reserve Bank. They can shape the economy by controlling the interest rates on loans, and introducing new money into the economy. TARP in conjunction with the Treasury and the subsequent reduction in interest rates is an example of monetary policy. Entire websites are devoted to this subject, but for our purposes this is mostly what you need to know.
All of this is merely the tip of the iceberg with economics. There are wars waging in the offices of DC’s elected, academic institutions, and water coolers of your place of business on what direction economics is headed. Imagine politics. You don’t simply get into it. You take a side, have educated opinions, and very often someone equally informed has the exact opposite opinion. Like politics though, all economists can agree that the debate is taking everyone to a better place, in the long run.
We aren’t done with economics by a long shot, as it is a central theme to this website. We’ll be back for more, and we’re looking for blood.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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