What is economics?

 What is economics? Economics is an interdisciplinarysocial, and behavioral science. Economic research focuses on explaining the behavior of decision-makers and the implications of behavior for society at the microeconomicmacroeconomic, and political levels. Decision-makers in economics are private households, firms, and governments. 

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Microeconomic level

At the microeconomic level, economics explains the human nature of making both individual rational and irrational decisions, social interactions, and behavior under risk. Individuals, organizations, and governments make allocation and distribution decisions daily, which economic subjects would like to evaluate. Economics derives the rules of determining; how efficient or optimal the decisions of economic subjects are. It, therefore, determines the necessary rules and coordination mechanisms useable in decision-making processes. Some of the coordination mechanisms include market, government, private, entrepreneurial coordination in an economy. An economy is the environmental unit of economic analysis. 

Macroeconomic level

Economics is also an environmental dimension of macro-environment analysis in the PESTEL-Framework in strategy management. Other PESTEL dimensions include the political, social, ecological, technological, and legal environment. At the macroeconomic level, economics discusses the aggregated effect at the level of the whole economy using the six macroeconomic objectives (magic hexagon).

Policy Level

At the political level, economics deals with the implication of economic decisions of different interest groups in an economy and derives policy recommendations to help maximize social welfare. Consumers, entrepreneurial, government interests are not always similar, but also employees’ and employers’ political interests differ. Therefore, economic policies are essential and help in balancing the different interests as well as maximizing the welfare of society.

Economics deals with Rational and Irrational Behavior

Evident in all economic literature is the issue of rational and irrational behavior as the central point of discussion. In economic theory, the economist tries to explain how people should make decisions depending on their goals and restrictions they face. Rational decisions are those decisions that respect the restrictions and goals of an individual, while irrational behavior could e.g. incur either a higher cost (not respecting restrictions) or lower utility (not respecting the goals) as compared to the rational decision. Rational decision is influence by the cost of opportunities.

Economics is about the Maximum and the Minimum Principle

Economists derive two principles of decision-making that drive the process of making decisions within economic subjects. The maximum principle and the minimum principle.

The Maximum Principle

The maximum principle suggests the following: Attain the maximum output with a predefined amount of inputs.

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The Minimum Principle

The minimum principle suggests the following: Utilize the minimum input to attain a predefined amount of output.

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How to research about Economics

Find a detailed definition of Economics in the International Encyclopedia of the Social & Behavioral Science (2001, Pages 4158-4159) via Science Direct.

Understanding the definition of economics

In order to understand the economics, it is essential to differentiate between decision-making from three different perspectives: private consumption and income decisions, public consumption and revenue generation, entrepreneurial production and supply of goods and services in an economy. As discussed above, economics is the science of rational decision-making. Firstly, economists try to explain, how economic subjects make rational decisions, the limitations of rational decision-making, human interactions and their outcomes. Secondly, economists try to capture the limits of rational behavior and explain how decision-making takes place under imperfect environment conditions; e. g. information asymmetries, uncertainty, imbalance in power between decision-makers … etc.

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Economic subjects

The concept of economic subjects is the notion of viewing people in an economy as (1) private households, (2) as firms (or organizations) and as (3) the government (also a form of organization). In general, this means that there are three economic subjects;

  • Private Households
  • Firms (private and public organizations)
  • Government (Public household and organization)

What is an Economy?

An economy is the analytical unit of interest for all economic analysis and includes the people, biosphere and all resources available e.g. a political unit (e.g. Germany, China, France, Ghana) or a unit specified by certain characteristics such as the a continent, a supranational unit, international coalition of nations etc.

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Published by James E Njoroge, M. Sc. Economics - CEO & Founder

M. Sc. Economics - Economic Consultant, Business Coach and private Lecturer in Freiburg im Breisgau. CEO and Founder of Evansonslabs Consulting and Coaching. Finance consultant, insurance agency at ERGO Hauptagentur James Njoroge in Freiburg im Breisgau

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