Economics is a social and behavioral science that explains the human nature of making both rational and irrational decisions. Deviations from the optimal decisions defined by the decision rules are deemed to be irrational behavior, while abiding by the decision rules the behavior is deemed to be rational behavior at the individual level and in some cases at the collective level of decision-making. Economics is an interdisciplinary approach to exploring human behavior in all forms of social, political, ecological, technological and legal environments. Therefore, economics can also be viewed as a dimension of the global environment (See SWOT & PESTLE-Framework) that explains the human decision-making processes and social interactions between members of the society. Every decision and choices made in this world can be viewed as an economic issue that economists deal with in their economic analysis.
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. incurr 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 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.
The Minimum Principle
The minimum principle suggests the following: Utilize the minimum input to attain a predefined amount of output.
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.
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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