What is economics? Economics is an interdisciplinary, social, and behavioral science. Economic research focuses on explaining the behavior of decision-makers and the implications of behavior for society at the microeconomic, macroeconomic, and political levels. Decision-makers in economics are private households, firms, and governments.
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.
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).
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.
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.
- Health and Economic Risk: Social Distancing as a Health Risk Management ToolSocial distancing measures propagated by health experts and belatedly by governments worldwide as a means of health risk minimizer, are yet to unfold their full impact on health risk management caused by the COVID-19. Nevertheless, social distancing poses a high risk to the economic and social life of affected communities globally. Fears of a global economic slowdown have dominated discussions amongst the public, experts of different disciplines, politicians, entrepreneurs, and others.
- Economic Policy Adjustments in Germany and in the USA amid Coronavirus-Pandemic and Corona-CrisisHow are Governments courageously dealing with the Coronavirus-Pandemic and the Corona-Crisis? Worldwide politicians are reacting very differently. Reactions to the pandemic have now become a war between optimism and pessimism. While some politicians realize how serious the current health crisis will be, others are busy procrastinating about an optimistic future. Early birds catch the worm and can navigate through the health crisis, taking leadership on flattening the pandemic spread of the Coronavirus.
- Health Economics and the Coronavirus: How do Pandemics contribute to Innovation?The Coronavirus has caused the Corona-Pandemic disease COVID-19 ravaging human health around the globe. But are we at the edge? Will health scientists find solutions to this pandemic? How can the Coronavirus Pandemic contribute toContinue reading “What is economics?”
- Synergy between Health and Economics: Oil-Price-Crash or Corona-CrashHealth shocks can also cause economic shocks (ceteris-paribus). The coronavirus pandemic is one of the health shocks that might unravel another global economic shock. Why is that the case? Fact number one, health is a basic human need. Consequently, the satisfaction the health needs requires human decision-making in all economies. Decision-makers face the challenge of managing the synergies between health and economics amid a health shock. How is the Scenario?
- Corona-Crash 2020 and the impact on the global economyMonday 09.03.2020, will historically be remembered as the Global Corona Crash, a global health shock, that hit almost all economies worldwide. What will be the global macroeconomic and microeconomic impact of the Corona Pandemic? The financial markets reacted toContinue reading “What is economics?”
- The magic square and hexagon of macroeconomic policy objectives of an economyEach national economy, in accordance with its economic order, pursues a number of quantitative and qualitative economic policy objectives in order to maximise the social welfare and economic welfare of an economy. The quantitative economicContinue reading “What is economics?”