Economics is the social science that studies how humans make decisions in the face of scarcity, the production, distribution, and consumption of goods and services. These can be individual decisions, family decisions, business decisions, or societal decisions.
Economists analyze problems differently than do other disciplinary experts. The main tools economists use are economic theories or models. A theory is not an illustration of the answer to a problem. Rather, a theory is a tool for determining the answer. We can organize societies as traditional, command, or market-oriented economies. Most societies are a mix. The last few decades have seen globalization evolve as a result of growth in commercial and financial networks that cross national borders, making businesses and workers from different economies increasingly interdependent.
The economic way of thinking provides a useful approach to understanding human behavior. Economists make the careful distinction between positive statements, which describe the world as it is, and normative statements, which describe how the world should be. Even when economics analyzes the gains and losses from various events or policies, and thus draws normative conclusions about how the world should be, the analysis of economics is rooted in a positive analysis of how people, firms, and governments actually behave, not how they should behave.
Microeconomics is a branch of economics that studies the behavior of individual economic agents, or systems with a limited number of agents, in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.
The microeconomic perspective focuses on parts of the economy: individuals, firms, and industries. Together with macroeconomics, which studies systems at an aggregate level, it constitutes the macro-category in which all disciplines related to the political economy can be grouped.
Basic concepts of microeconomics
The fundamentals of microeconomics originate from a basic human characteristic: unlimited desires with limited resources, while the available resources are allocated in a way that maximizes the overall benefit or happiness. The study of microeconomics involves several key concepts, including (but not limited to):
- Consumer demand theory (utility theory – consumer choice)
- Production theory and cost-of-production theory of value (price theory)
- Opportunity cost
- Industrial organization and market structure
Microeconomists study the many ways that markets can be structured, from perfect competition to monopolies, and the ways that production and prices will develop in these different types of markets.
Importance and scope of microeconomics
One of the main goals of studying microeconomics is to increase economic efficiency. It may have different forms and shapes, and it encompasses more than the industrial archetype of producing most output from least input: allocative efficiency, technical efficiency (X-inefficiency), and employment.
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. The macroeconomic perspective looks at the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation. Macroeconomics has two types of policies for pursuing these goals: monetary policy and fiscal policy.
- Principles of Economics 2e. OpenStax. Authors: Steven A. Greenlaw, David Shapiro. https://openstax.org/books/principles-economics-2e/pages/1-introduction