What is Economics, and how can students define economics as a science? In this article, our motivation is to find a general definition of economics. Subsequently, I will bridge between different angles of defining economic. In much of economic literature, there is also consensus and conflict on some description of economics as a science. So how do we start? To define economics neatly in lectures, we need a broad view of the term economics.
- Defining what is Economics
- Economics deals with Rational and Irrational Behavior
- Economics is about the Maximum and the Minimum Principle
- How to research Economics Topics
- Understanding the definition of Economics
- Economic Subjects are Decision-makers in an Economy
- What is an Economy?
Defining what is Economics
What if you started your economics lecture by asking the following question. What is economics? Then let the students reflect on the macro-environment dimensions of our world. You might finally end up delivering the message about our daily lives. Our daily lives occur in an economic, social, legal, technological, and political environment (PESTLE-Framework). In other words, we interact with other people in markets, education centers, organizations, and many different domains of interactions. These interactions are the potential sources of economic activities. Considering all that, we can define Economics as an interdisciplinary, social, and behavioral science. Hence, economic research focuses on explaining the behavior of decision-makers facing different restrictions and their social interactions.
For example, resource restrictions (Scarcity), social norms, and natural phenomena limit the achievable outcomes of decisions of economic subjects. Economics also explains the implications of the behavior of the decision-makers that affect society at the microeconomic, macroeconomic, and political levels. Such an analysis of different decision-makers consequently needs an interdisciplinary approach. Decision-makers in economics are private households, firms, and governments. Though we expect some unity among economists, that is not the case while defining economics. For a general entry, find some introductory literature and write a summary of definitions of economics. See our literature at the end of this article.
Microeconomic Level of Economics
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 choices of decision-makers in an economy are. It, therefore, defines the necessary regulations and coordination mechanisms usable in decision-making processes. Some coordination mechanisms include market, government, private, entrepreneurial coordination in an economy. An economy is the environmental unit of economic analysis.
After exploring the field of microeconomics and understanding the foundation of individual and collective decision-making, your economics study will consistently direct you to discover other areas of economics. For example, you will come across the following topics in your economic studies:
- Economic Policy,
- Business Administration,
- Human Resource,
- Leadership and Management,
- Finance and Investments,
- Financial Accounting,
Macroeconomic Level of Economics
How do we explain the macroeconomic level of economics? In strategy management, economics is also an environmental dimension of macro-environment analysis in the PESTEL-Framework. 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).
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. Employees’ and employers’ political interests also differ. Therefore, economic policies are essential and help balance the different interests and maximize 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 explains how people should make decisions depending on their goals and the restrictions they face. Rational decisions are those decisions that respect the limits and goals of an individual. At the same time, irrational behavior could, e.g., incur either a higher cost (not respecting restrictions) or lower utility (not respecting the goals) than the rational decision. The opportunity cost influences the decision.
Economics is about the Maximum and the Minimum Principle
Economists derive two principles of decision-making that drive decision-making decisions within economic subjects: the maximum principle and the minimum principle. Have you ever heard of an economic lecture where you will not be required to implement the maximum and minimum principles? But what do these two principles imply? Both principles capture the concept of opportunity costs.
The Maximum Principle
The maximum principle suggests the following: Decision-makers aim to attain the maximum output with a predefined amount of inputs.
The Minimum Principle
The minimum principle suggests the following: Decision-makers aim to utilize the minimum input to attain a predefined amount of output.
How to research Economics Topics
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
To understand economics, one must differentiate between decision-making from three perspectives: private consumption and income, 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 explain how economic subjects make sound 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 occurs under non-perfect environmental conditions, e. g. information asymmetries, uncertainty, imbalance in power between decision-makers, etc.
Economic Subjects are Decision-makers in an Economy
The concept of economic subjects is the notion of viewing people in an economy as (1) private households, (2) as firms (or organizations), and (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. It includes the people, biosphere, and all resources available, e.g., a political unit (e.g., Germany, China, France, Ghana) or as specified by specific characteristics such as a continent, a supranational organization like the European Union, an international coalition of nations, etc.