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Economics

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What is 'Economics'
Economics is a social science concerned with the production, distribution and
consumption of goods and services. It studies how individuals, businesses,
governments and nations make choices on allocating resources to satisfy their
wants and needs, and tries to determine how these groups should organize and
coordinate efforts to achieve maximum output.

Economic analysis often progresses through deductive processes, much like


mathematical logic, where the implications of specific human activities are
considered in a "means-ends" framework.

Economics can generally be broken down into macroeconomics, which


concentrates on the behavior of the aggregate economy, and microeconomics,
which focuses on individual consumers.

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Types of Economics
Economics study is generally broken down into two categories.

 Microeconomics focuses on how individual consumers and producers make their


decisions. This includes a single person, a household, a business or a governmental
organization. Microeconomics ranges from how these individuals trade with one another
to how prices are affected by the supply and demand of goods. Also studied are the
efficiency and costs associated with producing goods and services, how labor is divided
and allocated, uncertainty, risk, and strategic game theory.
 Macroeconomics studies the overall economy. This can include a distinct geographical
region, a country, a continent or even the whole world. Topics studied include
government fiscal and monetary policy, unemployment rates, growth as reflected by
changes in the Gross Domestic Product (GDP) and business cycles that result in
expansion, booms, recessions and depressions.

There are also schools of economic thought. Two of the most common
are Classical and Keynesian. The Classical view believes that free markets are the best
way to allocate resources and the government’s role should be limited to that of a fair,
strict referee. In contrast, the Keynesian approach believes that markets don’t work well
at allocating resources on their own, and that governments must step in from time to
time and actively reallocate resources efficiently.

Some branches of economic thought emphasize empiricism in economics, rather than


formal logic — specifically, macroeconomics or Marshallian microeconomics, which
attempt to use the procedural observations and falsifiable tests associated with the
natural sciences. Since true experiments cannot be created in economics, empirical
economists rely on simplifying assumptions and retroactive data analysis. However,
some economists argue economics is not well suited to empirical testing, and that such
methods often generate incorrect or inconsistent answers.

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The nature of economics


Economics is the scientific study of the ownership, use, and exchange of scarce
resources - often shortened to the science of scarcity. Economics is regarded as a
social science because it uses scientific methods to build theories that can help explain
the behaviour of individuals, groups and organisations. Economics attempts to
explain economic behaviour, which arises when scarce resources are exchanged.

In terms of methodology, economists, like other social scientists, are not able to
undertake controlled experiments in the way that chemists and biologists are. Hence,
economists have to employ different methods, based primarily on observation and
deduction and the construction of abstract models.
As the social sciences have evolved over the last 100 years, they have become
increasingly specialised. This is true for economics, as witnessed by the development of
many different strands of investigation
including micro and macro economics,pure and applied economics,
and industrial and financial economics. What links them all is the attempt to understand
how and why exchange takes place, and how exchange creates benefits and costs for
the participants.

The study of economics


The study of economics involves three related investigations.

1. Why scarce resources are exchanged?


2. How consumers and producers behave as they interact with each other in
markets, in their attempt to achieve mutually beneficial exchange?
3. The role of government in compensating for the limitations of markets in
achieving mutually beneficial exchange?

Positive economics is objective and fact based, while normative economics is subjective and
value based. Positive economic statements must be able to be tested and proved or
disproved. Normative economic statements are opinion based, so they cannot be proved or
disproved.

Normative economics (as opposed to positive economics) is a part of economicsthat


expresses value or normative judgments about economic fairness or what the outcome of
the economy or goals of public policy ought to be.

Positive economics (as opposed to normative economics) is the branch ofeconomics that
concerns the description and explanation of economicphenomena. It focuses on facts and
cause-and-effect behavioral relationships and includes the development and testing
of economics theories.

Positive Economics
Positive economics is based on facts and purely objective. That means, it describes
economic topics and issues without judging them. Because of this, positive economics is
sometimes also referred to as the “economics of what is”. Don’t worry, this will make
more sense once we get to the normative economics.

Now, how can you determine whether a statement is positive or not? One key aspect
that will help you with this is whether the statement can be falsified or not. If it can be
tested and proven (or disproven), it is a positive statement. At this point it is important
to keep in mind that the name has nothing to do with the result of the test (i.e. it is still
a positive statement even if the result of the test is negative).

To give an example, let’s look at a simple statement: “Lower income taxes result in
lower unemployment“. This is a positive statement, because it does not carry a value
judgement and it can easily be tested. In fact, all we need to do in order to find out if it
is true or not is comparing data on income tax and unemployment.

Normative Economics
Normative economics is based on values and therefore inherently subjective. That
means, it does not only describe economic issues but it judges them aswell. Therefore,
normative economics is sometimes also called the “economics of what ought to be”.
Going back to positive economics we can now see the major difference between the
two approaches. One of them describes the world as it is, whereas the other describes
the world as it should be.

So let’s talk about how you can identify a normative statement. The best way to do this
is to look for modal verbs such as should, ought, or must. They indicate obligations that
are often linked to values and personal opinions. In addition to that you can always
check if the statement can be proven or disproven. If that is not the case you are most
likely looking at a normative statement.

To illustrate this, let’s look at a another example statement: “The government should
reduce income taxes“. This is a normative statement. There is no way we can prove (or
disprove) that the government should reduce income taxes. The statement is solely
based on personal values and opinions.

In a Nutshell
There are two fundamentally different approaches to teaching economics: positive and
normative economics. Positive economics is based on facts and purely objective. It is is
sometimes also referred to as the “economics of what is”. By contrast, normative
economics is based on values and therefore inherently subjective. Hence, it is
sometimes also called the “economics of what ought to be”.

What Is Economic Development?


You most likely help fund economic development every time you purchase something at the store
and pay local or state sales tax. That cup of coffee, those new shoes you bought, or the real estate
taxes you may pay, all usually have a percentage of the sales going towards economic development
projects or initiatives.
In general, economic development is usually the focus of federal, state, and local governments to
improve our standard of living through the creation of jobs, the support of innovation and new ideas,
the creation of higher wealth, and the creation of an overall better quality of life. Economic
development is often defined by others based on what it is trying to accomplish. Many times these
objectives include building or improving infrastructure such as roads, bridges, etc.; improving our
education system through new schools; enhancing our public safety through fire and police service;
or incentivizing new businesses to open a location in a community.
Economic development often is categorized into the following three major areas:

1. Governments working on big economic objectives such as creating jobs or growing an


economy. These initiatives can be accomplished through written laws, industries' regulations,
and tax incentives or collections.
2. Programs that provide infrastructure and services such as bigger highways, community
parks, new school programs and facilities, public libraries or swimming pools, new hospitals,
and crime prevention initiatives.
3. Job creation and business retention through workforce development programs to help people
get the needed skills and education they need. This also includes small business
development programs that are geared to help entrepreneurs get financing or network with
other small businesses.

Economic development is the development of economic wealth of countries, regions or communities for
the well-being of their inhabitants. From a policy perspective, economic development can be defined as
efforts that seek to improve the economic well-being and quality of life for a community by creating and/or
retaining jobs and supporting or growing incomes and the tax base.

Overview
There are significant differences between economic growth and economic development. The term
"economic growth" refers to the increase (or growth) of a specific measure such as real national income,
gross domestic product, or per capita income. National income or product is commonly expressed in
terms of a measure of the aggregate value-added output of the domestic economy called gross domestic
product (GDP). When the GDP of a nation rises economists refer to it as economic growth.

The term "economic development," on the other hand, implies much more. It typically refers to
improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP is a
specific measure of economic welfare that does not take into account important aspects such as leisure
time, environmental quality, freedom, or social justice. Economic growth of any specific measure is not a
sufficient definition of economic development.

The economy is the social institution responsible for the production and distribution of goods.
The two dominant economic systems in the world are capitalism, under which resources and
means of production are privately owned, and socialism, a system under which those resources
are owned by the society as a whole.

Economic Agents
What are Economic Agents?
™Economic Agent – An economic decision maker who can recognise that different factors influence and
motivate different economic groups.
They ™shape the world we live in. The allocation of resources is dependent on their choices. There are 3
types of economic agents. They are:

 Consumers
 Firms (Producers)
 Governments
Consumers
™Consumer – One who consumes a produced good or service, generally by financial purpose.
™These are general high street shoppers, stockbrokers etc.

Firms
™Firm – Economic agents whose role is to transform factors of production into goods and services to sell.
™They can be public/private/voluntary.

Governments
™Government – An economic agent which provides rules for how firms and consumers should interact.
™This is evident in developed economies. An economy with higher levels of income have better service
sectors.