![Supply-demand-right-shift-demand](https://upload.wikimedia.org/wikipedia/commons/e/eb/Supply-demand-right-shift-demand.svg)
Economics ()
is the
social science
Social science is one of the branches of science, devoted to the study of societies and the relationships among individuals within those societies. The term was formerly used to refer to the field of sociology, the original "science of soc ...
that studies the
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
,
distribution Distribution may refer to:
Mathematics
*Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations
* Probability distribution, the probability of a particular value or value range of a vari ...
, and
consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
of
goods and services
Goods are items that are usually (but not always) tangible, such as pens, physical books, salt, apples, and hats. Services are activities provided by other people, who include architects, suppliers, contractors, technologists, teachers, doctor ...
.
Economics focuses on the behaviour and interactions of
economic agents
In economics, an agent is an actor (more specifically, a decision maker) in a model of some aspect of the economy. Typically, every agent makes decisions by solving a well- or ill-defined optimization or choice problem.
For example, ''buyers'' (c ...
and how
economies
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the p ...
work. Microeconomics analyzes what's viewed as basic elements in the economy, including individual agents and
markets
Market is a term used to describe concepts such as:
* Market (economics), system in which parties engage in transactions according to supply and demand
* Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, a ...
, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers.
Macroeconomics
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
analyzes the economy as a system where production, consumption, saving, and investment interact, and factors affecting it: employment of the resources of labour, capital, and land, currency
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
,
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
, and public policies that have impact on
these elements.
Other broad distinctions within economics include those between
positive economics
Positive economics (as opposed to normative economics) is the part of economics that deals with positive statements. That is, it focuses on the description, quantification and explanation of economic phenomena.Stanley Wong (1987). "positive economi ...
, describing "what is", and
normative economics Normative economics (as opposed to positive economics) is the part of economics that deals with normative statements. It focuses on the idea of fairness and what the outcome of the economy or goals of public policy ''ought to be''.Paul A. Samuelson ...
, advocating "what ought to be"; between economic theory and
applied economics
Applied economics is the study as regards the application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics (the other set being the ''core''), it is typically characterized by the application ...
; between
rational
Rationality is the quality of being guided by or based on reasons. In this regard, a person acts rationally if they have a good reason for what they do or a belief is rational if it is based on strong evidence. This quality can apply to an abili ...
and
behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
; and between
mainstream economics
Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to h ...
and
heterodox economics
Heterodox economics is any economic thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics.Frederic S. Lee, 2008. "heterodox economics," ''The New Palgrave Dictionary of Economics' ...
.
Economic analysis can be applied throughout society, including
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
,
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
,
health care
Health care or healthcare is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health profe ...
,
engineering
Engineering is the use of scientific method, scientific principles to design and build machines, structures, and other items, including bridges, tunnels, roads, vehicles, and buildings. The discipline of engineering encompasses a broad rang ...
[ ] and
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is a ...
. It is also applied to such diverse subjects as crime,
education
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Va ...
, the
family
Family (from la, familia) is a Social group, group of people related either by consanguinity (by recognized birth) or Affinity (law), affinity (by marriage or other relationship). The purpose of the family is to maintain the well-being of its ...
,
feminism
Feminism is a range of socio-political movements and ideologies that aim to define and establish the political, economic, personal, and social equality of the sexes. Feminism incorporates the position that society prioritizes the male po ...
,
law
Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
,
philosophy
Philosophy (from , ) is the systematized study of general and fundamental questions, such as those about existence, reason, knowledge, values, mind, and language. Such questions are often posed as problems to be studied or resolved. Some ...
,
politics
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...
,
religion
Religion is usually defined as a social- cultural system of designated behaviors and practices, morals, beliefs, worldviews, texts, sanctified places, prophecies, ethics, or organizations, that generally relates humanity to supernatural, ...
,
social institutions
Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...
,
war
War is an intense armed conflict between states, governments, societies, or paramilitary groups such as mercenaries, insurgents, and militias. It is generally characterized by extreme violence, destruction, and mortality, using regular o ...
,
science
Science is a systematic endeavor that builds and organizes knowledge in the form of testable explanations and predictions about the universe.
Science may be as old as the human species, and some of the earliest archeological evidence for ...
, and
the environment
The natural environment or natural world encompasses all living and non-living things occurring naturally, meaning in this case not artificial. The term is most often applied to the Earth or some parts of Earth. This environment encompasses t ...
.
Definitions of economics over time
The earlier term for the discipline was '
political economy
Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...
', but since the late 19th century, it has commonly been called 'economics'. The term is derived from the
Ancient Greek
Ancient Greek includes the forms of the Greek language used in ancient Greece and the ancient world from around 1500 BC to 300 BC. It is often roughly divided into the following periods: Mycenaean Greek (), Dark Ages (), the Archaic peri ...
(''oikonomikos''), "practiced in the management of a household or family" and therefore "frugal, thrifty", which in turn comes from (''oikonomia'') "household management" which in turn comes from (' "house") and (', "custom" or "law").
There are a variety of modern
definitions of economics
Various definitions of economics have been proposed, including, "what economists do". The earlier term for 'economics' was political 'economy'. It is adapted from the French Mercantilist usage of ''économie politique'', which extended ''economy ...
; some reflect evolving views of the subject or different views among economists.
Scottish philosopher
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
(1776) defined what was then called
political economy
Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...
as "an inquiry into the nature and causes of the wealth of nations", in particular as:
Jean-Baptiste Say
Jean-Baptiste Say (; 5 January 1767 – 15 November 1832) was a liberal French economist and businessman who argued in favor of competition, free trade and lifting restraints on business. He is best known for Say's law—also known as the law of ...
(1803), distinguishing the subject from its
public-policy uses, defined it as the science ''of'' production, distribution, and consumption of
wealth
Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
.
On the
satirical
Satire is a genre of the visual, literary, and performing arts, usually in the form of fiction and less frequently non-fiction, in which vices, follies, abuses, and shortcomings are held up to ridicule, often with the intent of shaming or e ...
side,
Thomas Carlyle
Thomas Carlyle (4 December 17955 February 1881) was a Scottish essayist, historian and philosopher. A leading writer of the Victorian era, he exerted a profound influence on 19th-century art, literature and philosophy.
Born in Ecclefechan, Dum ...
(1849) coined "
the dismal science
The dismal science is a derogatory term for the discipline of economics. Scottish essayist, historian and philosopher Thomas Carlyle used the phrase in his 1849 essay, ''Occasional Discourse on the Negro Question'', in contrast with the then-famil ...
" as an
epithet
An epithet (, ), also byname, is a descriptive term (word or phrase) known for accompanying or occurring in place of a name and having entered common usage. It has various shades of meaning when applied to seemingly real or fictitious people, di ...
for
classical economics
Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...
, in this context, commonly linked to the pessimistic analysis of
Malthus
Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography.
In his 1798 book ''An Essay on the Principle of Population'', Malt ...
(1798).
John Stuart Mill
John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, Member of Parliament (MP) and civil servant. One of the most influential thinkers in the history of classical liberalism, he contributed widely to ...
(1844) defined the subject in a social context as:
Alfred Marshall
Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
provided a still widely cited definition in his textbook ''
Principles of Economics'' (1890) that extended analysis beyond
wealth
Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
and from the
societal
A society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or social territory, typically subject to the same political authority and dominant cultural expectations. Societ ...
to the
microeconomic
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
level:
Lionel Robbins
Lionel Charles Robbins, Baron Robbins, (22 November 1898 – 15 May 1984) was a British economist, and prominent member of the economics department at the London School of Economics (LSE). He is known for his leadership at LSE, his proposed def ...
(1932) developed implications of what has been termed "
rhaps the most commonly accepted current definition of the subject":
Robbins described the definition as not ''classificatory'' in "pick
ngout certain ''kinds'' of behaviour" but rather ''analytical'' in "focus
ngattention on a particular ''aspect'' of behaviour, the form imposed by the influence of
scarcity
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
." He affirmed that previous economists have usually centred their studies on the analysis of wealth: how wealth is created (production), distributed, and consumed; and how wealth can grow. But he said that economics can be used to study other things, such as war, that are outside its usual focus. This is because war has as the goal winning it (as a sought after end), generates both cost and benefits; and, resources (human life and other costs) are used to attain the goal. If the war is not winnable or if the expected costs outweigh the benefits, the deciding actors (assuming they are rational) may never go to war (a decision) but rather explore other alternatives. We cannot define economics as the science that studies wealth, war, crime, education, and any other field economic analysis can be applied to; but, as the science that studies a particular common aspect of each of those subjects (they all use scarce resources to attain a sought after end).
Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behaviour and
rational-choice modelling
expanded the domain of the subject to areas previously treated in other fields.
There are other criticisms as well, such as in scarcity not accounting for the
macroeconomics
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
of high unemployment.
Gary Becker
Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
, a contributor to the expansion of economics into new areas, described the approach he favoured as "combin
ng the
Ng, ng, or NG may refer to:
* Ng (name) (黄 伍 吳), a surname of Chinese origin
Arts and entertainment
* N-Gage (disambiguation), a handheld gaming system
* Naked Giants, Seattle rock band
* ''Spirit Hunter: NG'', a video game
Businesses an ...
assumptions of maximizing behaviour, stable
preferences
In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision theo ...
, and
market equilibrium
In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
, used relentlessly and unflinchingly." One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the "choice process and the type of
social interaction
A social relation or also described as a social interaction or social experience is the fundamental unit of analysis within the social sciences, and describes any voluntary or involuntary interpersonal relationship between two or more individuals ...
that
uch
Uch ( pa, ;
ur, ), frequently referred to as Uch Sharīf ( pa, ;
ur, ; ''"Noble Uch"''), is a historic city in the southern part of Pakistan's Punjab, Pakistan, Punjab province. Uch may have been founded as Alexandria on the Indus, a town ...
analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which the author believes economics is evolving, or should evolve.
[
According to economist ]Ha-Joon Chang
Ha-Joon Chang (; ; born 7 October 1963) is a South Korean institutional economist, specialising in development economics. Chang is the author of several widely discussed policy books, most notably ''Kicking Away the Ladder: Development Strateg ...
economics should be defined not in terms of its methodology or theoretical approach but in terms of its subject matter. Ha-Joon Chang finds a definition like "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses" very peculiar because all other sciences define themselves in terms of the area of inquiry or object of inquiry rather than the methodology. In the biology department, they don't say that all biology should be studied with DNA analysis. People study living organisms in many different ways, so some people will do DNA analysis, others might do anatomy, and still others might build game theoretic models of animal behavior. But they are all called biology because they all study living organisms. According to Ha Joon Chang, this view that you can and should study the economy in only one way (for example by studying only rational choices), and going even one step further and basically redefining economics as a theory of everything, is very peculiar.
History of economic thought
From antiquity through the physiocrats
Questions regarding distribution of resources are found throughout the writings of the Boeotian
Boeotia ( ), sometimes Latinized as Boiotia or Beotia ( el, Βοιωτία; modern: ; ancient: ), formerly known as Cadmeis, is one of the regional units of Greece. It is part of the region of Central Greece. Its capital is Livadeia, and its lar ...
poet Hesiod
Hesiod (; grc-gre, Ἡσίοδος ''Hēsíodos'') was an ancient Greek poet generally thought to have been active between 750 and 650 BC, around the same time as Homer. He is generally regarded by western authors as 'the first written poet i ...
and several economic historians have described Hesiod himself as the "first economist". However, the word Oikos
The ancient Greek word ''oikos'' (ancient Greek: , plural: ; English prefix: eco- for ecology and economics) refers to three related but distinct concepts: the family, the family's property, and the house. Its meaning shifts even within texts.
The ...
, the Greek word from which the word economy derives, was used for issues regarding how to manage a household (which was understood to be the landowner, his family, and his slaves) rather than to refer to some normative societal system of distribution of resources, which is a much more recent phenomenon. Xenophon
Xenophon of Athens (; grc, wikt:Ξενοφῶν, Ξενοφῶν ; – probably 355 or 354 BC) was a Greek military leader, philosopher, and historian, born in Athens. At the age of 30, Xenophon was elected commander of one of the biggest Anci ...
, the author of the Oeconomicus
The ''Oeconomicus'' ( grc-gre, Οἰκονομικός) by Xenophon is a Socratic dialogue principally about household management and agriculture.
''Oeconomicus'' comes from the Ancient Greek words ''oikos'' for home or house and ''nemein'' w ...
, is credited by philologues for being the source of the word economy. Other notable writers from Antiquity through to the Renaissance
The Renaissance ( , ) , from , with the same meanings. is a period in European history marking the transition from the Middle Ages to modernity and covering the 15th and 16th centuries, characterized by an effort to revive and surpass ideas ...
which wrote on include Aristotle
Aristotle (; grc-gre, Ἀριστοτέλης ''Aristotélēs'', ; 384–322 BC) was a Greek philosopher and polymath during the Classical period in Ancient Greece. Taught by Plato, he was the founder of the Peripatetic school of phil ...
, Chanakya
Chanakya (Sanskrit: चाणक्य; IAST: ', ; 375–283 BCE) was an ancient Indian polymath who was active as a teacher, author, strategist, philosopher, economist, jurist, and royal advisor. He is traditionally identified as Kauṭilya o ...
(also known as Kautilya), Qin Shi Huang
Qin Shi Huang (, ; 259–210 BC) was the founder of the Qin dynasty and the first emperor of a unified China. Rather than maintain the title of "king" ( ''wáng'') borne by the previous Shang and Zhou rulers, he ruled as the First Emperor ( ...
, Ibn Khaldun
Ibn Khaldun (; ar, أبو زيد عبد الرحمن بن محمد بن خلدون الحضرمي, ; 27 May 1332 – 17 March 1406, 732-808 AH) was an Arab
The Historical Muhammad', Irving M. Zeitlin, (Polity Press, 2007), p. 21; "It is, of ...
, and Thomas Aquinas
Thomas Aquinas, OP (; it, Tommaso d'Aquino, lit=Thomas of Aquino; 1225 – 7 March 1274) was an Italian Dominican friar and priest who was an influential philosopher, theologian and jurist in the tradition of scholasticism; he is known wi ...
. Joseph Schumpeter
Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at Ha ...
described 16th and 17th century scholastic writers, including Tomás de Mercado
Tomás de Mercado (1525–1575) was a Spanish Dominican friar and both an economist and a theologian, best known for his book ''Summa de Tratos y Contratos'' ("Manual of Deals and Contracts") of 1571. Together with Martín de Azpilcueta he found ...
, Luis de Molina
Luis de Molina (29 September 1535 – 12 October 1600) was a Spanish Jesuit priest and scholastic, a staunch defender of free will in the controversy over human liberty and God's grace. His theology is known as Molinism.
Life
From 1551 t ...
, and Juan de Lugo
John de Lugo (also Juan de Lugo y de Quiroga and Xoan de Lugo) (1583–1660), a Spanish people, Spanish Jesuit and Cardinal (Catholicism), Cardinal, was an eminent theologian of the Baroque.monetary
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
, interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...
, and value
Value or values may refer to:
Ethics and social
* Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them
** Values (Western philosophy) expands the notion of value beyo ...
theory within a natural-law perspective.
Two groups, who later were called "mercantilists" and "physiocrats", more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism
Economic nationalism, also called economic patriotism and economic populism, is an ideology that favors state interventionism over other market mechanisms, with policies such as domestic control of the economy, labor, and capital formation, incl ...
and modern capitalism
The history of capitalism is diverse and the concept of capitalism has many debated roots. The history of the past 500 years is concerned with the development of capitalism in its various forms. Capital accumulated by a variety of methods, at a v ...
in Europe. Mercantilism
Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a ...
was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver. The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies.
Physiocrats
Physiocracy (; from the Greek for "government of nature") is an economic theory developed by a group of 18th-century Age of Enlightenment French economists who believed that the wealth of nations derived solely from the value of "land agricultur ...
, a group of 18th-century French thinkers and writers, developed the idea of the economy as a circular flow
The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit ...
of income and output. Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of ''laissez-faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups. ...
'', which called for minimal government intervention in the economy.
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
(1723–1790) was an early economic theorist. Smith was harshly critical of the mercantilists but described the physiocratic system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the subject.
Classical political economy
The publication of Adam Smith's ''The Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
'' in 1776, has been described as "the effective birth of economics as a separate discipline." The book identified land, labour, and capital as the three factors of production and the major contributors to a nation's wealth, as distinct from the physiocratic idea that only agriculture was productive.
Smith discusses potential benefits of specialization by division of labour
The division of labour is the separation of the tasks in any economic system or organisation so that participants may specialise (specialisation). Individuals, organizations, and nations are endowed with, or acquire specialised capabilities, and ...
, including increased labour productivity
Workforce productivity is the amount of goods and services that a group of workers produce in a given amount of time. It is one of several types of productivity that economists measure. Workforce productivity, often referred to as labor producti ...
and gains from trade
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
, whether between town and country or across countries. His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the functions of firm and industry
Industry may refer to:
Economics
* Industry (economics), a generally categorized branch of economic activity
* Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery
* The wider industrial sector ...
" and a "fundamental principle of economic organization." To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource-allocation theory – that, under competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
, resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment).
In an argument that includes "one of the most famous passages in all economics," Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society, and for the sake of profit, which is necessary at some level for employing capital in domestic industry, and positively related to the value of produce. In this:
The Rev. Thomas Robert Malthus
Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography.
In his 1798 book '' An Essay on the Principle of Population'', Mal ...
(1798) used the concept of diminishing returns
In economics, diminishing returns are the decrease in marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal ( ceteris paribu ...
to explain low living standards. Human population
Humans (''Homo sapiens'') are the most abundant and widespread species of primate, characterized by bipedalism and exceptional cognitive skills due to a large and complex brain. This has enabled the development of advanced tools, culture, ...
, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level. Economist Julian Lincoln Simon
Julian Lincoln Simon (February 12, 1932 – February 8, 1998) was an American professor of business administration at the University of Maryland and a Senior Fellow at the Cato Institute at the time of his death, after previously serving as a ...
has criticized Malthus's conclusions.
While Adam Smith emphasized the production of income, David Ricardo
David Ricardo (18 April 1772 – 11 September 1823) was a British Political economy, political economist. He was one of the most influential of the Classical economics, classical economists along with Thomas Robert Malthus, Thomas Malthus, Ad ...
(1817) focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits. Ricardo was the first to state and prove the principle of comparative advantage
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
, according to which each country should specialize in producing and exporting goods in that it has a lower ''relative'' cost of production, rather relying only on its own production. It has been termed a "fundamental analytical explanation" for gains from trade
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
.
Coming at the end of the classical tradition, John Stuart Mill
John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, Member of Parliament (MP) and civil servant. One of the most influential thinkers in the history of classical liberalism, he contributed widely to ...
(1848) parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it". Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. Other classical economists presented variations on Smith, termed the 'labour theory of value
The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it.
The LTV is usually associated with Marxian e ...
'. Classical economics focused on the tendency of any market economy to settle in a final stationary state made up of a constant stock of physical wealth (capital) and a constant population size.
Marxian economics
Marxist (later, Marxian) economics descends from classical economics and it derives from the work of Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
. The first volume of Marx's major work, ''Das Kapital
''Das Kapital'', also known as ''Capital: A Critique of Political Economy'' or sometimes simply ''Capital'' (german: Das Kapital. Kritik der politischen Ökonomie, link=no, ; 1867–1883), is a foundational theoretical text in Historical mater ...
'', was published in German in 1867. In it, Marx focused on the labour theory of value
The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it.
The LTV is usually associated with Marxian e ...
and the theory of surplus value
In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost ...
which, he believed, explained the exploitation of labour by capital. The labour theory of value held that the value of an exchanged commodity was determined by the labour that went into its production and the theory of surplus value demonstrated how the workers only got paid a proportion of the value their work had created.
Marxian economics was further developed by Karl Kautsky
Karl Johann Kautsky (; ; 16 October 1854 – 17 October 1938) was a Czech-Austrian philosopher, journalist, and Marxist theorist. Kautsky was one of the most authoritative promulgators of orthodox Marxism after the death of Friedrich Engels in ...
(1854-1938)'s ''The Economic Doctrines of Karl Marx'' and ''The Class Struggle (Erfurt Program)
The Class Struggle (Erfurt Program) (german: Das Erfurter Programm in seinem grundsätzlichen Theil erläutert von Karl Kautsky) is an 1892 book-length work by Karl Kautsky. It was first published in Stuttgart and was the official commentary of ...
'', Rudolf Hilferding
Rudolf Hilferding (10 August 1877 – 11 February 1941) was an Austrian-born Marxism, Marxist economist, Socialism, socialist theorist,International Institute of Social History, ''Rodolf Hilferding Papers''. http://www.iisg.nl/archives/en/files ...
's (1877-1941) ''Finance Capital
Rudolf Hilferding (10 August 1877 – 11 February 1941) was an Austrian-born Marxist economist, socialist theorist,International Institute of Social History, ''Rodolf Hilferding Papers''. http://www.iisg.nl/archives/en/files/h/10751012.php pol ...
'', Vladimir Lenin
Vladimir Ilyich Ulyanov. ( 1870 – 21 January 1924), better known as Vladimir Lenin,. was a Russian revolutionary, politician, and political theorist. He served as the first and founding head of government of Soviet Russia from 1917 to 19 ...
(1870-1924)'s ''The Development of Capitalism in Russia
''The Development of Capitalism in Russia'' () was an early economic work by Lenin written whilst he was in exile in Siberia. It was published in 1899 under the pseudonym of "Vladimir Ilyin".Paul Le Blanc (2008) ''Revolution, Democracy, Socialism ...
'' and ''Imperialism, the Highest Stage of Capitalism
''Imperialism, the Highest Stage of Capitalism'' (russian: Империализм как высшая стадия капитализма, Imperializm kak vysshaja stadija kapitalizma, link=no), originally published as ''Imperialism, the Newest S ...
'', and Rosa Luxemburg
Rosa Luxemburg (; ; pl, Róża Luksemburg or ; 5 March 1871 – 15 January 1919) was a Polish and naturalised-German revolutionary socialist, Marxist philosopher and anti-war activist. Successively, she was a member of the Proletariat party, ...
(1871-1919)'s ''The Accumulation of Capital
''The Accumulation of Capital'' (full title: ''The Accumulation of Capital: A Contribution to an Economic Explanation of Imperialism'', ''Die Akkumulation des Kapitals: Ein Beitrag zur ökonomischen Erklärung des Imperialismus'') is the princip ...
''.
Neoclassical economics
At the dawn as a social science, economics was defined and discussed at length as the study of production, distribution, and consumption of wealth by Jean-Baptiste Say in his ''Treatise on Political Economy or, The Production, Distribution, and Consumption of Wealth'' (1803). These three items are considered by the science only in relation to the increase or diminution of wealth, and not in reference to their processes of execution. Say's definition has prevailed up to our time, saved by substituting the word "wealth" for "goods and services" meaning that wealth may include non-material objects as well. One hundred and thirty years later, Lionel Robbins
Lionel Charles Robbins, Baron Robbins, (22 November 1898 – 15 May 1984) was a British economist, and prominent member of the economics department at the London School of Economics (LSE). He is known for his leadership at LSE, his proposed def ...
noticed that this definition no longer sufficed, because many economists were making theoretical and philosophical inroads in other areas of human activity. In his '' Essay on the Nature and Significance of Economic Science'', he proposed a definition of economics as a study of a particular aspect of human behaviour, the one that falls under the influence of scarcity, which forces people to choose, allocate scarce resources to competing ends, and economize (seeking the greatest welfare while avoiding the wasting of scarce resources). For Robbins, the insufficiency was solved, and his definition allows us to proclaim, with an easy conscience, education economics, safety and security economics, health economics, war economics, and of course, production, distribution and consumption economics as valid subjects of the economic science." Citing Robbins: "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses". After discussing it for decades, Robbins' definition became widely accepted by mainstream economists, and it has opened way into current textbooks. Although far from unanimous, most mainstream economists would accept some version of Robbins' definition, even though many have raised serious objections to the scope and method of economics, emanating from that definition. Due to the lack of strong consensus, and that production, distribution and consumption of goods and services is the prime area of study of economics, the old definition still stands in many quarters.
A body of theory later termed "neoclassical economics" or "marginalism
Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of wa ...
" formed from about 1870 to 1910. The term "economics" was popularized by such neoclassical economists as Alfred Marshall
Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
and Mary Paley Marshall as a concise synonym for "economic science" and a substitute for the earlier "political economy
Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...
". This corresponded to the influence on the subject of mathematical methods used in the natural science
Natural science is one of the branches of science concerned with the description, understanding and prediction of natural phenomena, based on empirical evidence from observation and experimentation. Mechanisms such as peer review and repeatab ...
s.
Neoclassical economics systematized supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value
The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it.
The LTV is usually associated with Marxian e ...
inherited from classical economics in favour of a marginal utility
In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a Goods (economics), good or Service (economics), service describes how much pleasure or satisfaction is gained by consumers as a result o ...
theory of value on the demand side and a more general theory of costs on the supply side. In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could be measured in favour of ordinal utility In economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to ask ...
, which hypothesizes merely behaviour-based relations across persons.
In microeconomics
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
, neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making
In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either rati ...
. An immediate example of this is the consumer theory
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In macroeconomics
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
it is reflected in an early and lasting neoclassical synthesis
The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Key ...
with Keynesian macroeconomics.
Neoclassical economics is occasionally referred as ''orthodox economics'' whether by its critics or sympathizers. Modern mainstream economics
Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to h ...
builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as econometrics
Econometrics is the application of Statistics, statistical methods to economic data in order to give Empirical evidence, empirical content to economic relationships.M. Hashem Pesaran (1987). "Econometrics," ''The New Palgrave: A Dictionary of ...
, game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
, analysis of market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
and imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
, and the neoclassical model of economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
for analysing long-run variables affecting national income
A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted nati ...
.
Neoclassical economics studies the behaviour of individual
An individual is that which exists as a distinct entity. Individuality (or self-hood) is the state or quality of being an individual; particularly (in the case of humans) of being a person unique from other people and possessing one's own Maslow ...
s, household
A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is im ...
s, and organization
An organization or organisation (Commonwealth English; see spelling differences), is an entity—such as a company, an institution, or an association—comprising one or more people and having a particular purpose.
The word is derived from ...
s (called economic actors, players, or agents), when they manage or use scarce
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
resources, which have alternative uses, to achieve desired ends. Agents are assumed to act rationally, have multiple desirable ends in sight, limited resources to obtain these ends, a set of stable preferences, a definite overall guiding objective, and the capability of making a choice. There exists an economic problem, subject to study by economic science, when a decision (choice) is made by one or more resource-controlling players to attain the best possible outcome under bounded rational conditions. In other words, resource-controlling agents maximize value subject to the constraints imposed by the information the agents have, their cognitive limitations, and the finite amount of time they have to make and execute a decision. Economic science centres on the activities of the economic agents that comprise society. They are the focus of economic analysis.
An approach to understanding these processes, through the study of agent behaviour under scarcity, may go as follows:
The continuous interplay (exchange or trade) done by economic actors in all markets sets the prices for all goods and services which, in turn, make the rational managing of scarce resources possible. At the same time, the decisions (choices) made by the same actors, while they are pursuing their own interest, determine the level of output (production), consumption, savings, and investment, in an economy, as well as the remuneration (distribution) paid to the owners of labour (in the form of wages), capital (in the form of profits) and land (in the form of rent). Each period, as if they were in a giant feedback system, economic players influence the pricing processes and the economy, and are in turn influenced by them until a steady state (equilibrium) of all variables involved is reached or until an external shock throws the system toward a new equilibrium point. Because of the autonomous actions of rational interacting agents, the economy is a complex adaptive system.
Keynesian economics
Keynesian economics derives from John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
, in particular his book ''The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
'' (1936), which ushered in contemporary macroeconomics
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
as a distinct field. The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low "effective demand
In economics, effective demand (ED) in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not ...
" and why even price flexibility and monetary policy might be unavailing. The term "revolutionary" has been applied to the book in its impact on economic analysis.
Keynesian economics has two successors. Post-Keynesian economics
Post-Keynesian economics is a school of economic thought with its origins in ''The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Wei ...
also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models. It is generally associated with the University of Cambridge
, mottoeng = Literal: From here, light and sacred draughts.
Non literal: From this place, we gain enlightenment and precious knowledge.
, established =
, other_name = The Chancellor, Masters and Schola ...
and the work of Joan Robinson
Joan Violet Robinson (''née'' Maurice; 31 October 1903 – 5 August 1983) was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics.
B ...
.
New-Keynesian economics
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroec ...
is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behaviour but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.
Chicago school of economics
The Chicago School of economics is best known for its free market advocacy and monetarist
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national ...
ideas. According to Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and monetarists, market economies are inherently stable if the money supply does not greatly expand or contract. Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
, former Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.
Milton Friedman effectively took many of the basic principles set forth by Adam Smith and the classical economists and modernized them. One example of this is his article in the 13 September 1970 issue of ''The New York Times Magazine'', in which he claims that the social responsibility of business should be "to use its resources and engage in activities designed to increase its profits ... (through) open and free competition without deception or fraud."
Austrian School of economics
The Austrian School
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian school ...
emphasizes human action
''Human Action: A Treatise on Economics'' is a work by the Austrian economist and philosopher Ludwig von Mises. Widely considered Mises' ''magnum opus'', it presents the case for laissez-faire capitalism based on praxeology, his method to under ...
, property rights
The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically ...
and the freedom to contract and transact to have a thriving and successful economy. It also emphasizes that the state should play an infinitesimally small role (if any role) in the regulation of economic activity between two transacting parties. A key component of Austrian economics is the principle of sound money. As Ludwig Von Mises
Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and Sociology, sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberali ...
, one of the most prominent 20th century Austrian economists, stated, "Ideologically it (sound money) belongs in the same class with political constitutions and bills of rights." Austrian economists assert that sound money prevents government actors from debasing the currency, disrupting the savings rate of the population and artificially distorting the economic choices of individual actors.
Other schools and approaches
Other well-known schools or trends of thought referring to a particular style of economics practised at and disseminated from well-defined groups of academicians that have become known worldwide, include the Freiburg School
__notoc__
The Freiburg school (german: Freiburger Schule) is a school of economic thought founded in the 1930s at the University of Freiburg.
It builds somewhat on the earlier historical school of economics but stresses that only some forms of com ...
, the School of Lausanne The Lausanne School of economics, sometimes referred to as the Mathematical School, refers to the neoclassical economics school of thought surrounding Léon Walras and Vilfredo Pareto. It is named after the University of Lausanne
The Universit ...
, post-Keynesian economics
Post-Keynesian economics is a school of economic thought with its origins in ''The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Wei ...
and the Stockholm school. Contemporary mainstream economics
Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to h ...
is sometimes separated into the Saltwater approach of those universities along the Eastern
Eastern may refer to:
Transportation
*China Eastern Airlines, a current Chinese airline based in Shanghai
*Eastern Air, former name of Zambia Skyways
*Eastern Air Lines, a defunct American airline that operated from 1926 to 1991
*Eastern Air Li ...
and Western
Western may refer to:
Places
*Western, Nebraska, a village in the US
*Western, New York, a town in the US
*Western Creek, Tasmania, a locality in Australia
*Western Junction, Tasmania, a locality in Australia
*Western world, countries that id ...
coasts of the US, and the Freshwater, or Chicago-school approach.
Within macroeconomics there is, in general order of their historical appearance in the literature; classical economics
Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...
, neoclassical economics, Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
, the neoclassical synthesis, monetarism
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on measures ...
, new classical economics
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical economics, neoclassical framework. Specifically, it emphasizes the importa ...
, New Keynesian economics
New Keynesian economics is a school of macroeconomics that strives to provide microfoundations, microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new ...
and the new neoclassical synthesis
The new neoclassical synthesis (NNS), which is now generally referred to as New Keynesian economics, and occasionally as the New Consensus, is the fusion of the major, modern macroeconomic schools of thought – new classical macroeconomics/real b ...
. In general, alternative developments include ecological economics, constitutional economics
Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economi ...
, institutional economics
Institutional economics focuses on understanding the role of the Sociocultural evolution, evolutionary process and the role of institutions in shaping Economy, economic Human behavior, behavior. Its original focus lay in Thorstein Veblen's instin ...
, evolutionary economics
Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, struc ...
, dependency theory
Dependency theory is the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former. A central contention of dependency theory is that poor s ...
, structuralist economics Structuralist economics is an approach to economics that emphasizes the importance of taking into account structural features (typically) when undertaking economic analysis. The approach originated with the work of the Economic Commission for Latin ...
, world systems theory
World-systems theory (also known as world-systems analysis or the world-systems perspective)Immanuel Wallerstein, (2004), "World-systems Analysis." In ''World System History'', ed. George Modelski, in ''Encyclopedia of Life Support Systems'' (E ...
, econophysics
Econophysics is a Heterodox economics, heterodox interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes ...
, econodynamics
Econodynamics is an empirical science that studies emergences, motion and disappearance of Value (economics), value—a specific concept that is used for description of the processes of creation and distribution of wealth. Any economic theory deals ...
, feminist economics
Feminist economics is the critical study of economics and economies, with a focus on gender-aware and inclusive economic inquiry and policy analysis. Feminist economic researchers include academics, activists, policy theorists, and practition ...
and biophysical economics
Thermoeconomics, also referred to as biophysical economics, is a school of heterodox economics that applies the laws of statistical mechanics to economic theory. Thermoeconomics can be thought of as the statistical physics of economic value and ...
.
Methodology
Theoretical research
Mainstream economic theory relies upon ''a priori
("from the earlier") and ("from the later") are Latin phrases used in philosophy to distinguish types of knowledge, justification, or argument by their reliance on empirical evidence or experience. knowledge is independent from current ex ...
'' quantitative economic models
In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework desig ...
, which employ a variety of concepts. Theory typically proceeds with an assumption of ''ceteris paribus
' (also spelled '; () is a Latin phrase, meaning "other things equal"; some other English translations of the phrase are "all other things being equal", "other things held constant", "all else unchanged", and "all else being equal". A statement ...
'', which means holding constant explanatory variables other than the one under consideration. When creating theories, the objective is to find ones which are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research than prior theories. While neoclassical economic theory constitutes both the dominant or orthodox theoretical as well as methodological framework
In its most common sense, methodology is the study of research methods. However, the term can also refer to the methods themselves or to the philosophical discussion of associated background assumptions. A method is a structured procedure for bri ...
, economic theory can also take the form of other schools of thought
A school of thought, or intellectual tradition, is the perspective of a group of people who share common characteristics of opinion or outlook of a philosophy, discipline, belief, social movement, economics, cultural movement, or art movement.
H ...
such as in heterodox economic theories.
In microeconomics
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
, principal concepts include supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
, marginalism
Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of wa ...
, rational choice theory
Rational choice theory refers to a set of guidelines that help understand economic and social behaviour. The theory originated in the eighteenth century and can be traced back to political economist and philosopher, Adam Smith. The theory postula ...
, opportunity cost
In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
, budget constraint
In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference ...
s, utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
, and the theory of the firm
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in econ ...
. Early macroeconomic
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
models focused on modelling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists, including new Keynesian
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroec ...
s, reformulated their models in microfoundations
Microfoundations are an effort to understand macroeconomic phenomena in terms of economic agents' behaviors and their interactions.Maarten Janssen (2008),Microfoundations, in ''The New Palgrave Dictionary of Economics'', 2nd ed. Research in microf ...
.
The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in monetary theory
Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and unit of account), and it ...
, the quantity theory of money
In monetary economics, the quantity theory of money (often abbreviated QTM) is one of the directions of Western economic thought that emerged in the 16th-17th centuries. The QTM states that the general price level of goods and services is directly ...
predicts that increases in the growth rate of the money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
increase inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
, and inflation is assumed to be influenced by rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model
A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16 ...
. In development economics
Development economics is a branch of economics which deals with economic aspects of the development process in low- and middle- income countries. Its focus is not only on methods of promoting economic development, economic growth and structural ...
, slower growth in developed nations has been sometimes predicted because of the declining marginal returns of investment and capital, and this has been observed in the Four Asian Tigers
The Four Asian Tigers (also known as the Four Asian Dragons or Four Little Dragons in Chinese and Korean) are the developed East Asian economies of Hong Kong, Singapore, South Korea, and Taiwan. Between the early 1960s and 1990s, they underwent ra ...
. Sometimes an economic hypothesis is only '' qualitative'', not ''quantitative''.
Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, mathematical economics
Mathematical economics is the application of mathematical methods to represent theories and analyze problems in economics. Often, these applied methods are beyond simple geometry, and may include differential and integral calculus, difference an ...
is the application of mathematical
Mathematics is an area of knowledge that includes the topics of numbers, formulas and related structures, shapes and the spaces in which they are contained, and quantities and their changes. These topics are represented in modern mathematics ...
methods to represent theories and analyze problems in economics. Paul Samuelson
Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he "h ...
's treatise ''Foundations of Economic Analysis
''Foundations of Economic Analysis'' is a book by Paul A. Samuelson published in 1947 (Enlarged ed., 1983) by Harvard University Press. It is based on Samuelson's 1941 doctoral dissertation at Harvard University. The book sought to demonstrate a ...
'' (1947) exemplifies the method, particularly as to maximizing behavioral relations of agents reaching equilibrium. The book focused on examining the class of statements called ''operationally meaningful theorems'' in economics, which are theorem
In mathematics, a theorem is a statement that has been proved, or can be proved. The ''proof'' of a theorem is a logical argument that uses the inference rules of a deductive system to establish that the theorem is a logical consequence of th ...
s that can conceivably be refuted by empirical data.
Empirical research
Economic theories are frequently tested empirical
Empirical evidence for a proposition is evidence, i.e. what supports or counters this proposition, that is constituted by or accessible to sense experience or experimental procedure. Empirical evidence is of central importance to the sciences and ...
ly, largely through the use of econometrics
Econometrics is the application of Statistics, statistical methods to economic data in order to give Empirical evidence, empirical content to economic relationships.M. Hashem Pesaran (1987). "Econometrics," ''The New Palgrave: A Dictionary of ...
using economic data
Economic data are data describing an actual economy, past or present. These are typically found in time-series form, that is, covering more than one time period (say the monthly unemployment rate for the last five years) or in cross-sectional data ...
. The controlled experiments common to the physical science
Physical science is a branch of natural science that studies non-living systems, in contrast to life science. It in turn has many branches, each referred to as a "physical science", together called the "physical sciences".
Definition
Physi ...
s are difficult and uncommon in economics, and instead broad data is observationally studied; this type of testing is typically regarded as less rigorous than controlled experimentation, and the conclusions typically more tentative. However, the field of experimental economics
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic expe ...
is growing, and increasing use is being made of natural experiments
A natural experiment is an empirical study in which individuals (or clusters of individuals) are exposed to the experimental and control conditions that are determined by nature or by other factors outside the control of the investigators. The pro ...
.
Statistical methods
Statistics (from German: ''Statistik'', "description of a state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, industria ...
such as regression analysis
In statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable (often called the 'outcome' or 'response' variable, or a 'label' in machine learning parlance) and one ...
are common. Practitioners use such methods to estimate the size, economic significance, and statistical significance
In statistical hypothesis testing, a result has statistical significance when it is very unlikely to have occurred given the null hypothesis (simply by chance alone). More precisely, a study's defined significance level, denoted by \alpha, is the p ...
("signal strength") of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is dependent upon the falsifiable
Falsifiability is a standard of evaluation of scientific theories and hypotheses that was introduced by the philosopher of science Karl Popper in his book ''The Logic of Scientific Discovery'' (1934). He proposed it as the cornerstone of a sol ...
hypothesis surviving tests. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests, data set A data set (or dataset) is a collection of data. In the case of tabular data, a data set corresponds to one or more database tables, where every column of a table represents a particular variable, and each row corresponds to a given record of the ...
s, and prior beliefs.
Criticisms based on professional standards and non-replicability
Reproducibility, also known as replicability and repeatability, is a major principle underpinning the scientific method. For the findings of a study to be reproducible means that results obtained by an experiment or an observational study or in a ...
of results serve as further checks against bias, errors, and overgeneralization, although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data. Like theories, uses of test statistics are themselves open to critical analysis, although critical commentary on papers in economics in prestigious journals such as the ''American Economic Review
The ''American Economic Review'' is a monthly peer-reviewed academic journal published by the American Economic Association. First published in 1911, it is considered one of the most prestigious and highly distinguished journals in the field of ec ...
'' has declined precipitously in the past 40 years. This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI).
In applied economics, input–output model
In economics, an input–output model is a quantitative economic model that represents the interdependencies between different sectors of a national economy or different regional economies.Thijs Ten Raa, Input–Output Economics: Theory and App ...
s employing linear programming
Linear programming (LP), also called linear optimization, is a method to achieve the best outcome (such as maximum profit or lowest cost) in a mathematical model whose requirements are represented by linear function#As a polynomial function, li ...
methods are quite common. Large amounts of data are run through computer programs to analyse the impact of certain policies; IMPLAN is one well-known example.
Experimental economics
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic expe ...
has promoted the use of scientifically controlled experiment
An experiment is a procedure carried out to support or refute a hypothesis, or determine the efficacy or likelihood of something previously untried. Experiments provide insight into Causality, cause-and-effect by demonstrating what outcome oc ...
s. This has reduced the long-noted distinction of economics from natural science
Natural science is one of the branches of science concerned with the description, understanding and prediction of natural phenomena, based on empirical evidence from observation and experimentation. Mechanisms such as peer review and repeatab ...
s because it allows direct tests of what were previously taken as axioms. In some cases these have found that the axioms are not entirely correct; for example, the ultimatum game
The ultimatum game is a game that has become a popular instrument of economic experiments. An early description is by Nobel laureate John Harsanyi in 1961. One player, the proposer, is endowed with a sum of money. The proposer is tasked with spl ...
has revealed that people reject unequal offers.
In behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
, psychologist Daniel Kahneman
Daniel Kahneman (; he, דניאל כהנמן; born March 5, 1934) is an Israeli-American psychologist and economist notable for his work on the psychology of judgment and decision-making, as well as behavioral economics, for which he was award ...
won the Nobel Prize in economics in 2002 for his and Amos Tversky
Amos Nathan Tversky ( he, עמוס טברסקי; March 16, 1937 – June 2, 1996) was an Israeli cognitive and mathematical psychologist and a key figure in the discovery of systematic human cognitive bias and handling of risk.
Much of his ...
's empirical discovery of several cognitive bias
A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment. Individuals create their own "subjective reality" from their perception of the input. An individual's construction of reality, not the objective input, m ...
es and heuristics
A heuristic (; ), or heuristic technique, is any approach to problem solving or self-discovery that employs a practical method that is not guaranteed to be optimal, perfect, or rational, but is nevertheless sufficient for reaching an immediate, ...
. Similar empirical testing occurs in neuroeconomics
Neuroeconomics is an interdisciplinary field that seeks to explain human decision-making, the ability to process multiple alternatives and to follow through on a plan of action. It studies how economic behavior can shape our understanding of the ...
. Another example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences. These techniques have led some to argue that economics is a "genuine science".
Branches of economics
Microeconomics
Microeconomics examines how entities, forming a market structure
Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it ...
, interact within a market
Market is a term used to describe concepts such as:
*Market (economics), system in which parties engage in transactions according to supply and demand
*Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, an ...
to create a market system
A market system (or market ecosystem) is any systematic process enabling many market players to offer and demand: helping buyers and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, quali ...
. These entities include private and public players with various classifications, typically operating under scarcity of tradable units and light government regulation
Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
. The item traded may be a tangible product
Product may refer to:
Business
* Product (business), an item that serves as a solution to a specific consumer problem.
* Product (project management), a deliverable or set of deliverables that contribute to a business solution
Mathematics
* Produ ...
such as apples or a service
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a pu ...
such as repair services, legal counsel, or entertainment.
In theory, in a free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
the aggregates (sum of) of ''quantity demanded'' by buyers and ''quantity supplied'' by sellers may reach economic equilibrium
In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
over time in reaction to price changes; in practice, various issues may prevent equilibrium, and any equilibrium reached may not necessarily be morally equitable. For example, if the supply of healthcare services is limited by external factors, the equilibrium price may be unaffordable for many who desire it but cannot pay for it.
Various market structures exist. In perfectly competitive markets, no participants are large enough to have the market power
In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market powe ...
to set the price of a homogeneous product. In other words, every participant is a "price taker" as no participant influences the price of a product. In the real world, markets often experience imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
.
Forms include monopoly
A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...
(in which there is only one seller of a good), duopoly
A duopoly (from Greek δύο, ''duo'' "two" and πωλεῖν, ''polein'' "to sell") is a type of oligopoly where two firms have dominant or exclusive control over a market. It is the most commonly studied form of oligopoly due to its simplicit ...
(in which there are only two sellers of a good), oligopoly (in which there are few sellers of a good), monopolistic competition
Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect ...
(in which there are many sellers producing highly differentiated goods), monopsony
In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity ...
(in which there is only one buyer of a good), and oligopsony
An oligopsony (from Greek ὀλίγοι (''oligoi'') "few" and ὀψωνία (''opsōnia'') "purchase") is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a marke ...
(in which there are few buyers of a good). Unlike perfect competition, imperfect competition invariably means market power is unequally distributed. Firms under imperfect competition have the potential to be "price makers", which means that, by holding a disproportionately high share of market power, they can influence the prices of their products.
Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being analysed does not affect other markets. This method of analysis is known as partial-equilibrium analysis (supply and demand). This method aggregates (the sum of all activity) in only one market. General-equilibrium theory studies various markets and their behaviour. It aggregates (the sum of all activity) across ''all'' markets. This method studies both changes in markets and their interactions leading towards equilibrium.
Production, cost, and efficiency
In microeconomics, production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a comm ...
or a service for exchange
Exchange may refer to:
Physics
*Gas exchange is the movement of oxygen and carbon dioxide molecules from a region of higher concentration to a region of lower concentration. Places United States
* Exchange, Indiana, an unincorporated community
* ...
or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption
Consumption may refer to:
*Resource consumption
*Tuberculosis, an infectious disease, historically
* Consumption (ecology), receipt of energy by consuming other organisms
* Consumption (economics), the purchasing of newly produced goods for curren ...
(food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads, etc.), public goods (national defence, smallpox vaccinations, etc.) or private good
A private good is defined in economics as "an item that yields positive benefits to people" that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its be ...
s (new computers, bananas, etc.), and "guns" vs "butter".
Opportunity cost
In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
is the economic cost Economic cost is the combination of losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. The comparis ...
of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive
In logic and probability theory, two events (or propositions) are mutually exclusive or disjoint if they cannot both occur at the same time. A clear example is the set of outcomes of a single coin toss, which can result in either heads or tails ...
actions. It has been described as expressing "the basic relationship between scarcity
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
and choice
A choice is the range of different things from which a being can choose. The arrival at a choice may incorporate motivators and models. For example, a traveler might choose a route for a journey based on the preference of arriving at a giv ...
". For example, if a baker uses a sack of flour to make pretzels one morning, then the baker cannot use either the flour or the morning to make bagels instead. Part of the cost of making pretzels is that neither the flour nor the morning are available any longer, for use in some other way. The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure
Leisure has often been defined as a quality of experience or as free time. Free time is time spent away from business, work, job hunting, domestic chores, and education, as well as necessary activities such as eating and sleeping. Leisure ...
, or anything else that provides the alternative benefit (utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
).
Inputs used in the production process include such primary factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...
as labour services, capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
(durable produced goods used in production, such as an existing factory), and land
Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various islan ...
(including natural resources). Other inputs may include intermediate good
Intermediate goods, producer goods or semi-finished products are goods, such as partly finished goods, used as inputs in the production of other goods including final goods. A firm may make and then use intermediate goods, or make and then sell, o ...
s used in production of final goods, such as the steel in a new car.
Economic efficiency
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
* Allocative or Pareto efficiency: any changes made to assist one person would harm another.
* Productive efficiency: no addit ...
measures how well a system generates desired output with a given set of inputs and available technology
Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...
. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced. A widely accepted general standard is Pareto efficiency
Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engine ...
, which is reached when no further change can make someone better off without making someone else worse off.
The production–possibility frontier
A production–possibility frontier (PPF), production possibility curve (PPC), or production possibility boundary (PPB), or transformation curve/boundary/frontier is a curve which shows various combinations of the amounts of two goods which can be ...
(PPF) is an expository figure for representing scarcity, cost, and efficiency. In the simplest case an economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
can produce just two goods (say "guns" and "butter"). The PPF is a table or graph (as at the right) showing the different quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total output. Each point on the curve shows potential total output for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good.
Scarcity
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
is represented in the figure by people being willing but unable in the aggregate to consume ''beyond the PPF'' (such as at ''X'') and by the negative slope of the curve. If production of one good ''increases'' along the curve, production of the other good ''decreases'', an inverse relationship
In statistics, there is a negative relationship or inverse relationship between two variables if higher values of one variable tend to be associated with lower values of the other. A negative relationship between two variables usually implies that ...
. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter.
The slope
In mathematics, the slope or gradient of a line is a number that describes both the ''direction'' and the ''steepness'' of the line. Slope is often denoted by the letter ''m''; there is no clear answer to the question why the letter ''m'' is use ...
of the curve at a point on it gives the trade-off
A trade-off (or tradeoff) is a situational decision that involves diminishing or losing one quality, quantity, or property of a set or design in return for gains in other aspects. In simple terms, a tradeoff is where one thing increases, and anot ...
between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a ''real opportunity cost''. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter. ''Along the PPF'', scarcity implies that choosing ''more'' of one good in the aggregate entails doing with ''less'' of the other good. Still, in a market economy
A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ...
, movement along the curve may indicate that the choice
A choice is the range of different things from which a being can choose. The arrival at a choice may incorporate motivators and models. For example, a traveler might choose a route for a journey based on the preference of arriving at a giv ...
of the increased output is anticipated to be worth the cost to the agents.
By construction, each point on the curve shows ''productive efficiency
In microeconomic theory, productive efficiency (or production efficiency) is a situation in which the economy or an economic system (e.g., bank, hospital, industry, country) operating within the constraints of current industrial technology canno ...
'' in maximizing output for given total inputs. A point ''inside'' the curve (as at ''A''), is feasible but represents ''production inefficiency'' (wasteful use of inputs), in that output of ''one or both goods'' could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high unemployment
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for Work (human activity), w ...
during a business-cycle
Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examini ...
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
or economic organization of a country that discourages full use of resources. Being on the curve might still not fully satisfy allocative efficiency
Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the mar ...
(also called Pareto efficiency
Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engine ...
) if it does not produce a mix of goods that consumers prefer over other points.
Much applied economics
Applied economics is the study as regards the application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics (the other set being the ''core''), it is typically characterized by the application ...
in public policy
Public policy is an institutionalized proposal or a decided set of elements like laws, regulations, guidelines, and actions to solve or address relevant and real-world problems, guided by a conception and often implemented by programs. Public p ...
is concerned with determining how the efficiency of an economy can be improved. Recognizing the reality of scarcity and then figuring out how to organize society for the most efficient use of resources has been described as the "essence of economics", where the subject "makes its unique contribution."
Specialization
Specialization is considered key to economic efficiency based on theoretical and empirical
Empirical evidence for a proposition is evidence, i.e. what supports or counters this proposition, that is constituted by or accessible to sense experience or experimental procedure. Empirical evidence is of central importance to the sciences and ...
considerations. Different individuals or nations may have different real opportunity costs of production, say from differences in stocks
Stocks are feet restraining devices that were used as a form of corporal punishment and public humiliation. The use of stocks is seen as early as Ancient Greece, where they are described as being in use in Solon's law code. The law describing ...
of human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
per worker or capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
/labour
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the labour ...
ratios. According to theory, this may give a comparative advantage
In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comp ...
in production of goods that make more intensive use of the relatively more abundant, thus ''relatively'' cheaper, input.
Even if one region has an absolute advantage
In economics, the principle of absolute advantage is the ability of a party (an individual, or firm, or country) to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first described the principle o ...
as to the ratio of its outputs to inputs in every type of output, it may still specialize in the output in which it has a comparative advantage and thereby gain from trading with a region that lacks any absolute advantage but has a comparative advantage in producing something else.
It has been observed that a high volume of trade occurs among regions even with access to a similar technology and mix of factor inputs, including high-income countries. This has led to investigation of economies of scale and agglomeration
Agglomeration may refer to:
* Urban agglomeration, in standard English
* Megalopolis, in Chinese English, as defined in China's ''Standard for basic terminology of urban planning'' (GB/T 50280—98). Also known as "city cluster".
* Economies of agg ...
to explain specialization in similar but differentiated product lines, to the overall benefit of respective trading parties or regions.
The general theory of specialization applies to trade among individuals, farms, manufacturers, service
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a pu ...
providers, and economies
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the p ...
. Among each of these production systems, there may be a corresponding ''division of labour
The division of labour is the separation of the tasks in any economic system or organisation so that participants may specialise (specialisation). Individuals, organizations, and nations are endowed with, or acquire specialised capabilities, and ...
'' with different work groups specializing, or correspondingly different types of capital equipment
A fixed asset, also known as long-lived assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that may not easily be converted into cash. Fixed assets are different from current assets, such as ca ...
and differentiated land
Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various islan ...
uses.
An example that combines features above is a country that specializes in the production of high-tech knowledge products, as developed countries do, and trades with developing nations for goods produced in factories where labour is relatively cheap and plentiful, resulting in different in opportunity costs of production. More total output and utility thereby results from specializing in production and trading than if each country produced its own high-tech and low-tech products.
Theory and observation set out the conditions such that market price
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
s of outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that (relatively) low-cost inputs go to producing low-cost outputs. In the process, aggregate output may increase as a by-product
A by-product or byproduct is a secondary product derived from a production process, manufacturing process or chemical reaction; it is not the primary product or service being produced.
A by-product can be useful and marketable or it can be consid ...
or by design
A design is a plan or specification for the construction of an object or system or for the implementation of an activity or process or the result of that plan or specification in the form of a prototype, product, or process. The verb ''to design'' ...
. Such specialization of production creates opportunities for gains from trade
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
whereby resource owners benefit from trade
Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market.
An early form of trade, barter, saw the direct excha ...
in the sale of one type of output for other, more highly valued goods. A measure of gains from trade is the ''increased income levels'' that trade may facilitate.
Supply and demand
Prices and quantities
In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not c ...
have been described as the most directly observable attributes of goods produced and exchanged in a market economy
A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ...
. The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In microeconomics
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
, it applies to price and output determination for a market with perfect competition
In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoret ...
, which includes the condition of no buyers or sellers large enough to have price-setting power
Power most often refers to:
* Power (physics), meaning "rate of doing work"
** Engine power, the power put out by an engine
** Electric power
* Power (social and political), the ability to influence people or events
** Abusive power
Power may a ...
.
For a given market of a commodity
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a comm ...
, ''demand'' is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). Demand theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is "constrained utility maximization" (with income and wealth
Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
as the constraints on demand). Here, utility
As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosopher ...
refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred.
The law of demand
In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), q ...
states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy (other things unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect
In economics and particularly in consumer choice theory, the substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer, the other being the income effect.
When a g ...
). In addition, purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
from the price decline increases ability to buy (the income effect
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
). Other factors can change demand; for example an increase in income will shift the demand curve for a normal good
In economics, a normal good is a type of a Good (economics), good which experiences an increase in demand due to an increase in income, unlike inferior goods, for which the opposite is observed. When there is an increase in a person's income, for ...
outward relative to the origin, as in the figure. All determinants are predominantly taken as constant factors of demand and supply.
''Supply'' is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be ''profit maximizers'', meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit. Supply is typically represented as a function relating price and quantity, if other factors are unchanged.
That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement. The "Law of Supply" states that, in general, a rise in price leads to an expansion in supply and a fall in price leads to a contraction in supply. Here as well, the determinants of supply, such as price of substitutes, cost of production, technology applied and various factors inputs of production are all taken to be constant for a specific time period of evaluation of supply.
Market equilibrium
In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This is posited to bid the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down. The model
A model is an informative representation of an object, person or system. The term originally denoted the Plan_(drawing), plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a mea ...
of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand (as to the figure), or in supply.
Firms
People frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through ''firms''. The most obvious kinds of firms are corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
s, partnerships
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...
and trusts
A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...
. According to Ronald Coase
Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. ...
, people begin to organize their production in firms when the costs of doing business becomes lower than doing it on the market. Firms combine labour and capital, and can achieve far greater economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
(when the average cost per unit declines as more units are produced) than individual market trading.
In perfectly competitive markets studied in the theory of supply and demand, there are many producers, none of which significantly influence price. Industrial organization
In economics, industrial organization is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and market (economics), markets. Industrial organization adds real-world complic ...
generalizes from that special case to study the strategic behaviour of firms that do have significant control of price. It considers the structure of such markets and their interactions. Common market structures studied besides perfect competition include monopolistic competition, various forms of oligopoly, and monopoly.
Managerial economics
Managerial economics is a branch of economics involving the application of economic methods in the managerial decision-making process.• Trefor Jones (2004). ''Business Economics and Managerial Decision Making'', WileyDescriptionand chapter-pre ...
applies microeconomic
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as operations research
Operations research ( en-GB, operational research) (U.S. Air Force Specialty Code: Operations Analysis), often shortened to the initialism OR, is a discipline that deals with the development and application of analytical methods to improve deci ...
and programming and from statistical methods such as regression analysis
In statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable (often called the 'outcome' or 'response' variable, or a 'label' in machine learning parlance) and one ...
in the absence of certainty and perfect knowledge. A unifying theme is the attempt to optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions.
Uncertainty and game theory
Uncertainty
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable or ...
in economics is an unknown prospect of gain or loss, whether quantifiable as risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environme ...
or not. Without it, household behaviour would be unaffected by uncertain employment and income prospects, financial
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
and capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
s would reduce to exchange of a single instrument in each market period, and there would be no communication
Communication (from la, communicare, meaning "to share" or "to be in relation with") is usually defined as the transmission of information. The term may also refer to the message communicated through such transmissions or the field of inquir ...
s industry. Given its different forms, there are various ways of representing uncertainty and modelling economic agents' responses to it.
Game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
is a branch of applied mathematics
Applied mathematics is the application of mathematical methods by different fields such as physics, engineering, medicine, biology, finance, business, computer science, and industry. Thus, applied mathematics is a combination of mathematical s ...
that considers strategic interactions between agents, one kind of uncertainty. It provides a mathematical foundation
Foundation may refer to:
* Foundation (nonprofit), a type of charitable organization
** Foundation (United States law), a type of charitable organization in the U.S.
** Private foundation, a charitable organization that, while serving a good cause ...
of industrial organization
In economics, industrial organization is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and market (economics), markets. Industrial organization adds real-world complic ...
, discussed above, to model different types of firm behaviour, for example in a solipsistic industry (few sellers), but equally applicable to wage negotiations, bargaining
In the social sciences, bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service debate the price or nature of a transaction. If the bargaining produces agreement on terms, the transaction takes plac ...
, contract design, and any situation where individual agents are few enough to have perceptible effects on each other. In behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
, it has been used to model the strategies agents choose when interacting with others whose interests are at least partially adverse to their own.
In this, it generalizes maximization approaches developed to analyse market actors such as in the supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
model and allows for incomplete information of actors. The field dates from the 1944 classic ''Theory of Games and Economic Behavior
''Theory of Games and Economic Behavior'', published in 1944 by Princeton University Press, is a book by mathematician John von Neumann and economist Oskar Morgenstern which is considered the groundbreaking text that created the interdisciplinar ...
'' by John von Neumann
John von Neumann (; hu, Neumann János Lajos, ; December 28, 1903 – February 8, 1957) was a Hungarian-American mathematician, physicist, computer scientist, engineer and polymath. He was regarded as having perhaps the widest cove ...
and Oskar Morgenstern
Oskar Morgenstern (January 24, 1902 – July 26, 1977) was an Austrian-American economist. In collaboration with mathematician John von Neumann, he founded the mathematical field of game theory as applied to the social sciences and strategic decis ...
. It has significant applications seemingly outside of economics in such diverse subjects as the formulation of nuclear strategies
Nuclear strategy involves the development of doctrines and strategies for the production and use of nuclear weapons.
As a sub-branch of military strategy, nuclear strategy attempts to match nuclear weapons as means to political ends. In addit ...
, ethics
Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and wrong behavior".''Internet Encyclopedia of Philosophy'' The field of ethics, along with aesthetics, concerns m ...
, political science
Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and la ...
, and evolutionary biology
Evolutionary biology is the subfield of biology that studies the evolutionary processes (natural selection, common descent, speciation) that produced the diversity of life on Earth. It is also defined as the study of the history of life fo ...
.
Risk aversion
In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more ce ...
may stimulate activity that in well-functioning markets smooths out risk and communicates information about risk, as in markets for insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
, commodity futures contracts
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
, and financial instruments
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
. Financial economics
Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade".William F. Sharpe"Financial ...
or simply finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
describes the allocation of financial resources. It also analyses the pricing of financial instruments, the financial structure
Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allo ...
of companies, the efficiency and fragility of financial market
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
s, financial crises
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
, and related government policy or regulation
Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
.
Some market organizations may give rise to inefficiencies associated with uncertainty. Based on George Akerlof
George Arthur Akerlof (born June 17, 1940) is an American economist and a university professor at the McCourt School of Public Policy at Georgetown University and Koshland Professor of Economics Emeritus at the University of California, Berkeley. ...
's "Market for Lemons
''The Market for Lemons: Quality Uncertainty and the Market Mechanism'' is a widely-cited 1970 paper by economist George Akerlof which examines how the quality of goods traded in a market can degrade in the presence of information asymmetry betwe ...
" article, the paradigm
In science and philosophy, a paradigm () is a distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitute legitimate contributions to a field.
Etymology
''Paradigm'' comes f ...
example is of a dodgy second-hand car market. Customers without knowledge of whether a car is a "lemon" depress its price below what a quality second-hand car would be. Information asymmetry
In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other.
Information asymmetry creates an imbalance of power in transactions, which ca ...
arises here, if the seller has more relevant information than the buyer but no incentive to disclose it. Related problems in insurance are adverse selection
In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expe ...
, such that those at most risk are most likely to insure (say reckless drivers), and moral hazard
In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
, such that insurance results in riskier behaviour (say more reckless driving).
Both problems may raise insurance costs and reduce efficiency by driving otherwise willing transactors from the market ("incomplete markets In economics, incomplete markets are markets in which there does not exist an Arrow–Debreu security for every possible state of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transfer ...
"). Moreover, attempting to reduce one problem, say adverse selection by mandating insurance, may add to another, say moral hazard. Information economics
Information economics or the economics of information is the branch of microeconomics that studies how information and information systems affect an economy and economic decisions.
One application considers information embodied in certain types o ...
, which studies such problems, has relevance in subjects such as insurance, contract law
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
, mechanism design
Mechanism design is a field in economics and game theory that takes an objectives-first approach to designing economic mechanisms or incentives, toward desired objectives, in strategic settings, where players act rationally. Because it starts a ...
, monetary economics
Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and unit of account), and it ...
, and health care
Health care or healthcare is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health profe ...
. Applied subjects include market and legal remedies to spread or reduce risk, such as warranties, government-mandated partial insurance, restructuring
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons ...
or bankruptcy law
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...
, inspection, and regulation
Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For ...
for quality and information disclosure.
Market failure
The term "market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
" encompasses several problems which may undermine standard economic assumptions. Although economists categorize market failures differently, the following categories emerge in the main texts.
Authors critical of economics tend to view the talk of "market failiures", as a term which is used when economic theories don't correspond with reality, making these theories and paradigms in which these terms are used unfalsifiable
Falsifiability is a standard of evaluation of scientific theories and hypotheses that was introduced by the philosopher of science Karl Popper in his book ''The Logic of Scientific Discovery'' (1934). He proposed it as the cornerstone of a so ...
.
Information asymmetries
In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other.
Information asymmetry creates an imbalance of power in transactions, which ca ...
and incomplete markets In economics, incomplete markets are markets in which there does not exist an Arrow–Debreu security for every possible state of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transfer ...
may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies, as discussed above.
Natural monopoly
A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
, or the overlapping concepts of "practical" and "technical" monopoly, is an extreme case of ''failure of competition'' as a restraint on producers. Extreme economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
are one possible cause.
Public goods
In economics, a public good (also referred to as a social good or collective good)Oakland, W. H. (1987). Theory of public goods. In Handbook of public economics (Vol. 2, pp. 485-535). Elsevier. is a good that is both non-excludable and non-riva ...
are goods which are under-supplied in a typical market. The defining features are that people can consume public goods without having to pay for them and that more than one person can consume the good at the same time.
Externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
occur where there are significant social costs or benefits from production or consumption that are not reflected in market prices. For example, air pollution may generate a negative externality, and education may generate a positive externality (less crime, etc.). Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise promote the purchase of goods that have positive externalities in an effort to correct the price distortions
In signal processing, distortion is the alteration of the original shape (or other characteristic) of a signal. In communications and electronics it means the alteration of the waveform of an information-bearing signal, such as an audio signa ...
caused by these externalities. Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment for changes of equilibrium due to a shift in demand or supply.
In many areas, some form of price stickiness
Nominal rigidity, also known as price-stickiness or wage-stickiness, is a situation in which a nominal price is resistant to change. Complete nominal rigidity occurs when a price is fixed in nominal terms for a relevant period of time. For exampl ...
is postulated to account for quantities, rather than prices, adjusting in the short run to changes on the demand side or the supply side. This includes standard analysis of the business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
in macroeconomics
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
. Analysis often revolves around causes of such price stickiness and their implications for reaching a hypothesized long-run equilibrium. Examples of such price stickiness in particular markets include wage rates in labour markets and posted prices in markets deviating from perfect competition
In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoret ...
.
Some specialized fields of economics deal in market failure more than others. The economics of the public sector
Public economics ''(or economics of the public sector)'' is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve s ...
is one example. Much environmental economics
Environmental economics is a sub-field of economics concerned with environmental issues. It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or ...
concerns externalities or "public bad
A public bad, in economics, is the symmetrical opposite of a public good. Air pollution is the most obvious example since it is non-excludable and non-rival, and negatively affects welfare.For current definitions of public bads see: Charles D. Ko ...
s".
Policy
Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an organ ...
options include regulations that reflect cost-benefit analysis or market solutions that change incentives, such as emission fees or redefinition of property rights.
Welfare
Welfare economics uses microeconomics techniques to evaluate well-being
Well-being, or wellbeing, also known as wellness, prudential value or quality of life, refers to what is intrinsically valuable relative ''to'' someone. So the well-being of a person is what is ultimately good ''for'' this person, what is in th ...
from allocation
Allocation may refer to:
Computing
* Block allocation map
* C++ allocators
* Delayed allocation
* File allocation table
* IP address allocation
* Memory allocation
* No-write allocation (cache)
* Register allocation
Economics
* Asset alloca ...
of productive factors as to desirability and economic efficiency
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
* Allocative or Pareto efficiency: any changes made to assist one person would harm another.
* Productive efficiency: no addit ...
within an economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
, often relative to competitive general equilibrium
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ov ...
. It analyzes ''social welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
'', however measured, in terms of economic activities of the individuals that compose the theoretical society considered. Accordingly, individuals, with associated economic activities, are the basic units for aggregating to social welfare, whether of a group, a community, or a society, and there is no "social welfare" apart from the "welfare" associated with its individual units.
Macroeconomics
Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down", that is, using a simplified form of general-equilibrium theory. Such aggregates include national income and output, the unemployment rate
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the referen ...
, and price inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
and fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...
.
Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modelling of sectors, including rationality
Rationality is the quality of being guided by or based on reasons. In this regard, a person acts rationally if they have a good reason for what they do or a belief is rational if it is based on strong evidence. This quality can apply to an abil ...
of players, efficient use of market information, and imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
. This has addressed a long-standing concern about inconsistent developments of the same subject.
Macroeconomic analysis also considers factors affecting the long-term level and growth
Growth may refer to:
Biology
* Auxology, the study of all aspects of human physical growth
* Bacterial growth
* Cell growth
* Growth hormone, a peptide hormone that stimulates growth
* Human development (biology)
* Plant growth
* Secondary growth ...
of national income. Such factors include capital accumulation, technological change
Technological change (TC) or technological development is the overall process of invention, innovation and diffusion of technology or processes.From ''The New Palgrave Dictionary otechnical change by S. Metcalfe. •biased and biased techn ...
and labour force
The workforce or labour force is a concept referring to the pool of human beings either in employment or in unemployment. It is generally used to describe those working for a single company or industry, but can also apply to a geographic regio ...
growth.
Growth
''Growth economics'' studies factors that explain economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
– the increase in output ''per capita
''Per capita'' is a Latin phrase literally meaning "by heads" or "for each head", and idiomatically used to mean "per person". The term is used in a wide variety of social sciences and statistical research contexts, including government statistic ...
'' of a country over a long period of time. The same factors are used to explain differences in the ''level'' of output ''per capita'' ''between'' countries, in particular why some countries grow faster than others, and whether countries converge
Converge may refer to:
* Converge (band), American hardcore punk band
* Converge (Baptist denomination), American national evangelical Baptist body
* Limit (mathematics)
* Converge ICT, internet service provider in the Philippines
*CONVERGE CFD s ...
at the same rates of growth.
Much-studied factors include the rate of investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
, population growth
Population growth is the increase in the number of people in a population or dispersed group. Actual global human population growth amounts to around 83 million annually, or 1.1% per year. The global population has grown from 1 billion in 1800 to ...
, and technological change
Technological change (TC) or technological development is the overall process of invention, innovation and diffusion of technology or processes.From ''The New Palgrave Dictionary otechnical change by S. Metcalfe. •biased and biased techn ...
. These are represented in theoretical and empirical
Empirical evidence for a proposition is evidence, i.e. what supports or counters this proposition, that is constituted by or accessible to sense experience or experimental procedure. Empirical evidence is of central importance to the sciences and ...
forms (as in the neoclassical and endogenous
Endogenous substances and processes are those that originate from within a living system such as an organism, tissue, or cell.
In contrast, exogenous substances and processes are those that originate from outside of an organism.
For example, es ...
growth models) and in growth accounting Growth accounting is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy. Growth accounting decomposes ...
.
Business cycle
The economics of a depression were the spur for the creation of "macroeconomics" as a separate discipline. During the Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
of the 1930s, John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
authored a book entitled ''The General Theory of Employment, Interest and Money
''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...
'' outlining the key theories of Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
. Keynes contended that aggregate demand
In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is ...
for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.
He therefore advocated active policy responses by the public sector
The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...
, including monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
actions by the central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
and fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...
actions by the government to stabilize output over the business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
.
Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment
Full employment is a situation in which there is no cyclical or unemployment#Cyclical unemployment, deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely Structu ...
levels. John Hicks
Sir John Richards Hicks (8 April 1904 – 20 May 1989) was a British economist. He is considered one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economic ...
' IS/LM model has been the most influential interpretation of ''The General Theory''.
Over the years, understanding of the business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
has branched into various research program
A research program (British English: research programme) is a professional network of scientists conducting basic research. The term was used by philosopher of science Imre Lakatos to blend and revise the normative model of science offered by Karl ...
mes, mostly related to or distinct from Keynesianism. The neoclassical synthesis
The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Key ...
refers to the reconciliation of Keynesian economics with neoclassical economics
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, stating that Keynesianism is correct in the short run In economics, the long-run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long-run contrasts with the short-run, in which there are some constraints an ...
but qualified by neoclassical-like considerations in the intermediate and long run In economics, the long-run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long-run contrasts with the short-run, in which there are some constraints an ...
.
New classical macroeconomics
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical economics, neoclassical framework. Specifically, it emphasizes the importa ...
, as distinct from the Keynesian view of the business cycle, posits market clearing
In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand so that there is no excess supply or demand. The new classical economics assumes that in any given market, assum ...
with imperfect information
In economics, perfect information (sometimes referred to as "no hidden information") is a feature of perfect competition. With perfect information in a market, all consumers and producers have complete and instantaneous knowledge of all market pr ...
. It includes Friedman's permanent income hypothesis
The permanent income hypothesis (PIH) is a model in the field of economics to explain the formation of consumption patterns. It suggests consumption patterns are formed from future expectations and consumption smoothing. The theory was developed ...
on consumption and "rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model
A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16 ...
" theory, led by Robert Lucas, and real business cycle theory
Real business-cycle theory (RBC theory) is a class of new classical macroeconomics models in which business-cycle fluctuations are accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC the ...
.
In contrast, the new Keynesian
New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroec ...
approach retains the rational expectations assumption, however it assumes a variety of market failures
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
. In particular, New Keynesians assume prices and wages are "sticky
Sticky may refer to:
People
*Sticky (musician), alias of UK garage producer Richard Forbes
* Sticky Fingaz or Sticky (born 1973), nickname of the US rapper and actor Kirk Jones
Adhesion
*Adhesion
Adhesion is the tendency of dissimilar ...
", which means they do not adjust instantaneously to changes in economic conditions.
Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are needed because the "long run" may be very long.
Unemployment
The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labour force. The labour force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labour force. Unemployment can be generally broken down into several types that are related to different causes.
Classical models of unemployment occurs when wages are too high for employers to be willing to hire more workers. Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment.[
]Structural unemployment
Structural unemployment is a form of involuntary unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers (also known as the skills gap). Structural unemployment i ...
covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just the short term search process.
While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates. Okun's law
In economics, Okun's law is an empirically observed relationship between unemployment and losses in a country's production. It is named after Arthur Melvin Okun, who first proposed the relationship in 1962. The "gap version" states that for every ...
represents the empirical relationship between unemployment and economic growth. The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.
Inflation and monetary policy
Money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
is a ''means of final payment'' for goods in most price system
In economics, a price system is a system through which the valuations of any forms of property (tangible or intangible) are determined. All societies use price systems in the allocation and exchange of resources as a consequence of scarcity. Even ...
economies, and is the unit of account
In economics, unit of account is one of the money functions. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of rela ...
in which prices are typically stated. Money has general acceptability, relative consistency in value, divisibility, durability, portability, elasticity in supply, and longevity with mass public confidence. It includes currency held by the nonbank public and checkable deposits. It has been described as a social convention
A convention is a set of agreed, stipulated, or generally accepted standards, norms, social norms, or criteria, often taking the form of a custom.
In a social context, a convention may retain the character of an "unwritten law" of custom (for ex ...
, like language, useful to one largely because it is useful to others. In the words of Francis Amasa Walker
Francis Amasa Walker (July 2, 1840 – January 5, 1897) was an American economist, statistician, journalist, educator, academic administrator, and an officer in the Union Army.
Walker was born into a prominent Boston family, the son of the econo ...
, a well-known 19th-century economist, "Money is what money does" ("Money is ''that'' money does" in the original).
As a medium of exchange
In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency.
The origin of "mediums of exchange" in human societies is ass ...
, money facilitates trade. It is essentially a measure of value and more importantly, a store of value being a basis for credit creation. Its economic function can be contrasted with barter
In trade, barter (derived from ''baretor'') is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distingu ...
(non-monetary exchange). Given a diverse array of produced goods and specialized producers, barter may entail a hard-to-locate double coincidence of wants
The coincidence of wants (often known as double coincidence of wants) is an economic phenomenon where two parties each hold an item that the other wants, so they exchange these items directly without any monetary medium. Within economics, this h ...
as to what is exchanged, say apples and a book. Money can reduce the transaction cost
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...
of exchange because of its ready acceptability. Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces.
At the level of an economy
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
, theory
A theory is a rational type of abstract thinking about a phenomenon, or the results of such thinking. The process of contemplative and rational thinking is often associated with such processes as observational study or research. Theories may be s ...
and evidence are consistent with a positive relationship
In mathematics, two sequences of numbers, often experimental data, are proportional or directly proportional if their corresponding elements have a constant ratio, which is called the coefficient of proportionality or proportionality constan ...
running from the total money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
to the nominal value
In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not c ...
of total output and to the general price level
The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set. ...
. For this reason, management of the money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
is a key aspect of monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
.
Fiscal policy
Governments implement fiscal policy to influence macroeconomic conditions by adjusting spending and taxation policies to alter aggregate demand. When aggregate demand falls below the potential output of the economy, there is an output gap
The GDP gap or the output gap is the difference between actual GDP or actual output and potential GDP, in an attempt to identify the current economic position over the business cycle. The measure of output gap is largely used in macroeconomic po ...
where some productive capacity is left unemployed. Governments increase spending and cut taxes to boost aggregate demand. Resources that have been idled can be used by the government.
For example, unemployed home builders can be hired to expand highways. Tax cuts allow consumers to increase their spending, which boosts aggregate demand. Both tax cuts and spending have multiplier effects where the initial increase in demand from the policy percolates through the economy and generates additional economic activity.
The effects of fiscal policy can be limited by crowding out. When there is no output gap, the economy is producing at full capacity and there are no excess productive resources. If the government increases spending in this situation, the government uses resources that otherwise would have been used by the private sector, so there is no increase in overall output. Some economists think that crowding out is always an issue while others do not think it is a major issue when output is depressed.
Sceptics of fiscal policy also make the argument of Ricardian equivalence
The Ricardian equivalence proposition (also known as the Ricardo–de Viti–Barro equivalence theorem) is an economic hypothesis holding that consumers are forward-looking and so internalize the government's budget constraint when making their con ...
. They argue that an increase in debt will have to be paid for with future tax increases, which will cause people to reduce their consumption and save money to pay for the future tax increase. Under Ricardian equivalence, any boost in demand from tax cuts will be offset by the increased saving intended to pay for future higher taxes.
Public economics
Public economics is the field of economics that deals with economic activities of a public sector
The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...
, usually government. The subject addresses such matters as tax incidence
In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom tax is initially imposed. The tax ...
(who really pays a particular tax), cost-benefit analysis of government programmes, effects on economic efficiency
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
* Allocative or Pareto efficiency: any changes made to assist one person would harm another.
* Productive efficiency: no addit ...
and income distribution
In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes eco ...
of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of public choice theory
Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science".Gordon Tullock, 9872008, "public choice," ''The New Palgrave Dictionary of Economics''. . Its content includes the st ...
, models public-sector behaviour analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.
Much of economics is positive
Positive is a property of positivity and may refer to:
Mathematics and science
* Positive formula, a logical formula not containing negation
* Positive number, a number that is greater than 0
* Plus sign, the sign "+" used to indicate a posit ...
, seeking to describe and predict economic phenomena. Normative economics Normative economics (as opposed to positive economics) is the part of economics that deals with normative statements. It focuses on the idea of fairness and what the outcome of the economy or goals of public policy ''ought to be''.Paul A. Samuelson ...
seeks to identify what economies ''ought'' to be like.
Welfare economics is a normative branch of economics that uses microeconomic
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
techniques to simultaneously determine the allocative efficiency
Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the mar ...
within an economy and the income distribution Distribution may refer to:
Mathematics
*Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations
* Probability distribution, the probability of a particular value or value range of a vari ...
associated with it. It attempts to measure social welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet Basic needs, basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refe ...
by examining the economic activities of the individuals that comprise society.
International economics
International trade studies determinants of goods-and-services flows across international boundaries. It also concerns the size and distribution of gains from trade
In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplus plus producer surplus from lower tariffs ...
. Policy applications include estimating the effects of changing tariff
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and poli ...
rates and trade quotas. International finance
International finance (also referred to as international monetary economics or international macroeconomics) is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. Inter ...
is a macroeconomic field which examines the flow of capital across international borders, and the effects of these movements on exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
s. Increased trade in goods, services and capital between countries is a major effect of contemporary globalization
Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...
.
Labor economics
Labor economics seeks to understand the functioning and dynamics of the markets
Market is a term used to describe concepts such as:
* Market (economics), system in which parties engage in transactions according to supply and demand
* Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, a ...
for wage labor
Wage labour (also wage labor in American English), usually referred to as paid work, paid employment, or paid labour, refers to the socioeconomic relationship between a worker and an employer in which the worker sells their labour power under a ...
. Labor markets function through the interaction of workers and employers. Labor economics looks at the suppliers of labor services (workers), the demands of labor services (employers), and attempts to understand the resulting pattern of wages, employment, and income. In economics, labor is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...
as land
Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various islan ...
and capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
. There are theories which have developed a concept called human capital
Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...
(referring to the skills that workers possess, not necessarily their actual work), although there are also counter posing macro-economic system theories that think human capital is a contradiction in terms.
Development economics
Development economics examines economic aspects of the economic development
In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and o ...
process in relatively low-income countries
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
focusing on structural change
In economics, structural change is a shift or change in the basic ways a market or economy functions or operates.
Such change can be caused by such factors as economic development, global shifts in capital and labor, changes in resource availabil ...
, poverty
Poverty is the state of having few material possessions or little income. Poverty can have diverse social, economic, and political causes and effects. When evaluating poverty in ...
, and economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
. Approaches in development economics frequently incorporate social and political factors.
Criticism
Economics has historically been subject to criticism that it relies on unrealistic, unverifiable, or highly simplified assumptions, in some cases because these assumptions simplify the proofs of desired conclusions. For example, the economist Friedrich Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...
claimed that economics (at least historically) used a scientistic approach which he claimed was "''decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed''". Latter-day examples of such assumptions include perfect information
In economics, perfect information (sometimes referred to as "no hidden information") is a feature of perfect competition. With perfect information in a market, all consumers and producers have complete and instantaneous knowledge of all market pr ...
, profit maximization
In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, w ...
and rational choices, axioms of neoclassical economics. Such criticisms often conflate neoclassical economics with all of contemporary economics. The field of information economics
Information economics or the economics of information is the branch of microeconomics that studies how information and information systems affect an economy and economic decisions.
One application considers information embodied in certain types o ...
includes both mathematical-economical research and also behavioural economics
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory.
...
, akin to studies in behavioural psychology
Behaviorism is a systematic approach to understanding the behavior of humans and animals. It assumes that behavior is either a reflex evoked by the pairing of certain antecedent stimuli in the environment, or a consequence of that individual ...
, and confounding factors to the neoclassical assumptions are the subject of substantial study in many areas of economics.
Prominent historical mainstream economists such as Keynes and Joskow observed that much of the economics of their time was conceptual rather than quantitative, and difficult to model and formalize quantitatively. In a discussion on oligopoly research, Paul Joskow
Paul may refer to:
*Paul (given name), a given name (includes a list of people with that name)
* Paul (surname), a list of people
People
Christianity
*Paul the Apostle (AD c.5–c.64/65), also known as Saul of Tarsus or Saint Paul, early Chri ...
pointed out in 1975 that in practice, serious students of actual economies tended to use "informal models" based upon qualitative factors specific to particular industries. Joskow had a strong feeling that the important work in oligopoly was done through informal observations while formal models were "trotted out '' ex post''". He argued that formal models were largely not important in the empirical work, either, and that the fundamental factor behind the theory of the firm, behaviour, was neglected. Deirdre McCloskey
Deirdre Nansen McCloskey (born Donald N. McCloskey; September 11, 1942 in Ann Arbor, Michigan) is the distinguished professor of economics, history, english, and communication at the University of Illinois at Chicago (UIC). She is also adjunct pr ...
has argued that many empirical economic studies are poorly reported, and she and Stephen Ziliak
Stephen T. Ziliak (born October 17, 1963) is an American professor of economics whose research and essays span disciplines from statistics and beer brewing to medicine and poetry. He is currently a faculty member of the Angiogenesis Foundation, con ...
argue that although her critique has been well-received, practice has not improved. The extent to which practice has improved since the early 2000s is contested: although economists have noted the discipline's adoption of increasingly rigorous modeling, other have criticized the field's focus on creating computer simulations detached from reality, as well as noting the loss of prestige suffered by the field for failing to anticipate the Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
.
Issues like central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
independence, central bank policies and rhetoric in central bank governors discourse or the premises of macroeconomic policies
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
(monetary
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
and fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...
) of the state
State may refer to:
Arts, entertainment, and media Literature
* ''State Magazine'', a monthly magazine published by the U.S. Department of State
* ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, United States
* ''Our S ...
are a focus of contention and criticism.
In the 1990s, feminist critiques of neoclassical economic models gained prominence, leading to the formation of feminist economics
Feminist economics is the critical study of economics and economies, with a focus on gender-aware and inclusive economic inquiry and policy analysis. Feminist economic researchers include academics, activists, policy theorists, and practition ...
. Feminist economists call attention to the social construction of economics and claims to highlight the ways in which its models and methods reflect masculine preferences. Primary criticisms focus on: the assumed selfish nature of actors (homo economicus
The term ''Homo economicus'', or economic man, is the portrayal of humans as agents who are consistently rational and narrowly self-interested, and who pursue their subjectively defined ends optimally. It is a word play on ''Homo sapiens'', u ...
); exogenous
In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system.
Economics
In an economic model, an exogeno ...
tastes ; the difficulty of utility comparisons across agents; the exclusion of unpaid work
Unpaid labor or unpaid work is defined as labor or work that does not receive any direct remuneration. This is a form of non-market work which can fall into one of two categories: (1) unpaid work that is placed within the production boundary of ...
in Macroeconomic
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
measures; and the lack of consideration for class and gender.
Economics has been derogatorily dubbed "the dismal science
The dismal science is a derogatory term for the discipline of economics. Scottish essayist, historian and philosopher Thomas Carlyle used the phrase in his 1849 essay, ''Occasional Discourse on the Negro Question'', in contrast with the then-famil ...
", first coined by the Victorian historian Thomas Carlyle in the 19th century. It is often stated that Carlyle gave it this nickname as a response to the work of Thomas Robert Malthus
Thomas Robert Malthus (; 13/14 February 1766 – 29 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography.
In his 1798 book '' An Essay on the Principle of Population'', Mal ...
, who predicted widespread starvation resulting from projections that population growth would exceed the rate of increase in the food supply. However, the actual phrase was coined by Carlyle in the context of a debate with John Stuart Mill on slavery
Slavery and enslavement are both the state and the condition of being a slave—someone forbidden to quit one's service for an enslaver, and who is treated by the enslaver as property. Slavery typically involves slaves being made to perf ...
, in which Carlyle argued for slavery; the "dismal" nature of economics in Carlyle's view was that it " oundthe secret of this Universe in 'supply and demand', and reduc dthe duty of human governors to that of letting men alone"."
Related subjects
Economics is one social science
Social science is one of the branches of science, devoted to the study of societies and the relationships among individuals within those societies. The term was formerly used to refer to the field of sociology, the original "science of soc ...
among several and has fields bordering on other areas, including economic geography
Economic geography is the subfield of human geography which studies economic activity and factors affecting them. It can also be considered a subfield or method in economics.
There are four branches of economic geography.
There is,
primary secto ...
, economic history
Economic history is the academic learning of economies or economic events of the past. Research is conducted using a combination of historical methods, statistical methods and the application of economic theory to historical situations and ins ...
, public choice
Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science".Gordon Tullock, The New Palgrave: A Dictionary of Economics, 9872008, "public choice," ''The New Palgrave Dictionar ...
, energy economics
Energy economics is a broad scientific subject area which includes topics related to supply and use of energy in societies. Considering the cost of energy services and associated value gives economic meaning to the efficiency at which energy c ...
, cultural economics
__NOTOC__
Cultural economics is the branch of economics that studies the relation of culture to economic outcomes. Here, 'culture' is defined by shared beliefs and preferences of respective groups. Programmatic issues include whether and how mu ...
, family economics
Family economics applies economic concepts such as production, division of labor, distribution, and decision making to the family. It is used to explain outcomes unique to family—such as marriage, the decision to have children, fertility, p ...
and institutional economics
Institutional economics focuses on understanding the role of the Sociocultural evolution, evolutionary process and the role of institutions in shaping Economy, economic Human behavior, behavior. Its original focus lay in Thorstein Veblen's instin ...
.
Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of legal rules, to assess which legal rules are economically efficient
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
* Allocative or Pareto efficiency: any changes made to assist one person would harm another.
* Productive efficiency: no addit ...
, and to predict what the legal rules will be. A seminal article by Ronald Coase
Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. ...
published in 1961 suggested that well-defined property rights could overcome the problems of externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
.
Political economy
Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...
is the interdisciplinary study that combines economics, law, and political science
Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and la ...
in explaining how political institutions, the political environment, and the economic system (capitalist, socialist
Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes the e ...
, mixed) influence each other. It studies questions such as how monopoly, rent-seeking
Rent-seeking is the act of growing one's existing wealth without creating new wealth by manipulating the social or political environment.
Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effi ...
behaviour, and externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
should impact government policy. Historian
A historian is a person who studies and writes about the past and is regarded as an authority on it. Historians are concerned with the continuous, methodical narrative and research of past events as relating to the human race; as well as the stu ...
s have employed ''political economy'' to explore the ways in the past that persons and groups with common economic interests have used politics to effect changes beneficial to their interests.
Energy economics
Energy economics is a broad scientific subject area which includes topics related to supply and use of energy in societies. Considering the cost of energy services and associated value gives economic meaning to the efficiency at which energy c ...
is a broad scientific
Science is a systematic endeavor that builds and organizes knowledge in the form of testable explanations and predictions about the universe.
Science may be as old as the human species, and some of the earliest archeological evidence for ...
subject area which includes topics related to energy supply Energy supply is the delivery of fuels or transformed fuels to point of consumption. It potentially encompasses the extraction, transmission, generation, distribution and storage of fuels. It is also sometimes called energy flow.
This supply o ...
and energy demand
World energy supply and consumption is global production and preparation of fuel, generation of electricity, energy transport, and energy consumption. It is a basic part of economic activity. It includes heat, but not energy from food.
This art ...
. Georgescu-Roegen
Nicholas Georgescu-Roegen (born Nicolae Georgescu, 4 February 1906 – 30 October 1994) was a Romanian mathematician, statistician and economist. He is best known today for his 1971 ''The Entropy Law and the Economic Process'', in which he argu ...
reintroduced the concept of entropy
Entropy is a scientific concept, as well as a measurable physical property, that is most commonly associated with a state of disorder, randomness, or uncertainty. The term and the concept are used in diverse fields, from classical thermodynam ...
in relation to economics and energy from thermodynamics
Thermodynamics is a branch of physics that deals with heat, work, and temperature, and their relation to energy, entropy, and the physical properties of matter and radiation. The behavior of these quantities is governed by the four laws of the ...
, as distinguished from what he viewed as the mechanistic foundation of neoclassical economics drawn from Newtonian physics. His work contributed significantly to thermoeconomics
Thermoeconomics, also referred to as biophysical economics, is a school of heterodox economics that applies the laws of statistical mechanics to economic theory. Thermoeconomics can be thought of as the statistical physics of economic value and ...
and to ecological economics. He also did foundational work which later developed into evolutionary economics
Evolutionary economics is part of mainstream economics as well as a heterodox school of economic thought that is inspired by evolutionary biology. Much like mainstream economics, it stresses complex interdependencies, competition, growth, struc ...
.
The sociological
Sociology is a social science that focuses on society, human social behavior, patterns of social relationships, social interaction, and aspects of culture associated with everyday life. It uses various methods of empirical investigation and ...
subfield of economic sociology
Economic sociology is the study of the social cause and effect of various economic phenomena. The field can be broadly divided into a classical period and a contemporary one, known as "new economic sociology".
The classical period was concerned ...
arose, primarily through the work of Émile Durkheim
David Émile Durkheim ( or ; 15 April 1858 – 15 November 1917) was a French sociologist. Durkheim formally established the academic discipline of sociology and is commonly cited as one of the principal architects of modern social science, al ...
, Max Weber
Maximilian Karl Emil Weber (; ; 21 April 186414 June 1920) was a German sociologist, historian, jurist and political economist, who is regarded as among the most important theorists of the development of modern Western society. His ideas profo ...
and Georg Simmel
Georg Simmel (; ; 1 March 1858 – 26 September 1918) was a German sociologist, philosopher, and critic.
Simmel was influential in the field of sociology. Simmel was one of the first generation of German sociologists: his neo-Kantian approach l ...
, as an approach to analysing the effects of economic phenomena in relation to the overarching social paradigm (i.e. modernity
Modernity, a topic in the humanities and social sciences, is both a historical period (the modern era) and the ensemble of particular socio-cultural norm (social), norms, attitudes and practices that arose in the wake of the Renaissancein the " ...
). Classic works include Max Weber
Maximilian Karl Emil Weber (; ; 21 April 186414 June 1920) was a German sociologist, historian, jurist and political economist, who is regarded as among the most important theorists of the development of modern Western society. His ideas profo ...
's ''The Protestant Ethic and the Spirit of Capitalism
''The Protestant Ethic and the Spirit of Capitalism'' (german: Die protestantische Ethik und der Geist des Kapitalismus) is a book written by Max Weber, a German sociologist, economist, and politician. Begun as a series of essays, the original ...
'' (1905) and Georg Simmel
Georg Simmel (; ; 1 March 1858 – 26 September 1918) was a German sociologist, philosopher, and critic.
Simmel was influential in the field of sociology. Simmel was one of the first generation of German sociologists: his neo-Kantian approach l ...
's ''The Philosophy of Money
''The Philosophy of Money'' (1900; )Simmel, Georg. 2004 900br>''The Philosophy of Money'' (3rd enlarged ed.) edited by D. Frisby, translated by D. Frisby and T. Bottomore. London: Routledge. – via Eddie Jackson. is a book on economic sociology b ...
'' (1900). More recently, the works of James S. Coleman, Mark Granovetter
Mark Sanford Granovetter (; born October 20, 1943) is an American sociologist and professor at Stanford University. He is best known for his work in social network theory and in economic sociology, particularly his theory on the spread of inform ...
, Peter Hedstrom
Peter may refer to:
People
* List of people named Peter, a list of people and fictional characters with the given name
* Peter (given name)
** Saint Peter (died 60s), apostle of Jesus, leader of the early Christian Church
* Peter (surname), a su ...
and Richard Swedberg
Richard Swedberg (born 18 May 1948) is a Swedish sociologist. He is currently Professor Emeritus at the Department of Sociology at Cornell University.
Education
He received a PhD in sociology from Boston College (1978); he also holds a law degr ...
have been influential in this field.
Gary Becker
Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
in 1974 presented an economic theory of social interactions, whose applications included the family
Family (from la, familia) is a Social group, group of people related either by consanguinity (by recognized birth) or Affinity (law), affinity (by marriage or other relationship). The purpose of the family is to maintain the well-being of its ...
, charity, merit good The economics concept of a merit good, originated by Richard Musgrave (economist), Richard Musgrave (1957, 1959), is a Good (economics and accounting), commodity which is judged that an individual or society should have on the basis of some concept ...
s and multiperson interactions, and envy and hatred.
He and Kevin Murphy authored a book in 2001 that analyzed market behavior in a social environment.
Profession
The professionalization of economics, reflected in the growth of graduate programmes on the subject, has been described as "the main change in economics since around 1900". Most major universities
A university () is an institution of higher (or tertiary) education and research which awards academic degrees in several academic disciplines. Universities typically offer both undergraduate and postgraduate programs. In the United States, t ...
and many colleges have a major, school, or department in which academic degrees
An academic degree is a qualification awarded to students upon successful completion of a course of study in higher education, usually at a college or university. These institutions commonly offer degrees at various levels, usually including unde ...
are awarded in the subject, whether in the liberal arts
Liberal arts education (from Latin "free" and "art or principled practice") is the traditional academic course in Western higher education. ''Liberal arts'' takes the term ''art'' in the sense of a learned skill rather than specifically the ...
, business, or for professional study.
See Bachelor of Economics
The Bachelor of Economics (BEc or BEcon),
or the "Bachelor of Applied Economics", is a bachelor's degree awarded by many universities and colleges for completion of an undergraduate program in economics, econometrics, or applied economics;
the ...
and Master of Economics
The Master of Economics (MEcon or MEc) is a postgraduate master's degree in economics comprising training in economic theory, econometrics, and/or applied economics.
The degree is also offered as an MS or MSc, MA or MCom in economics;
varian ...
.
In the private sector, professional economists are employed as consultants and in industry, including banking
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
and finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
. Economists also work for various government departments and agencies, for example, the national treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or in p ...
, central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
or National Bureau of Statistics. See Economic analyst
An economist is a professional and practitioner in the social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
.
There are dozens of prizes awarded to economists each year for outstanding intellectual contributions to the field, the most prominent of which is the Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
, though it is not a Nobel Prize
The Nobel Prizes ( ; sv, Nobelpriset ; no, Nobelprisen ) are five separate prizes that, according to Alfred Nobel's will of 1895, are awarded to "those who, during the preceding year, have conferred the greatest benefit to humankind." Alfr ...
.
Contemporary economics uses mathematics. Economists draw on the tools of calculus
Calculus, originally called infinitesimal calculus or "the calculus of infinitesimals", is the mathematical study of continuous change, in the same way that geometry is the study of shape, and algebra is the study of generalizations of arithm ...
, linear algebra
Linear algebra is the branch of mathematics concerning linear equations such as:
:a_1x_1+\cdots +a_nx_n=b,
linear maps such as:
:(x_1, \ldots, x_n) \mapsto a_1x_1+\cdots +a_nx_n,
and their representations in vector spaces and through matrices.
...
, statistics
Statistics (from German language, German: ''wikt:Statistik#German, Statistik'', "description of a State (polity), state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of ...
, game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
, and computer science
Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information theory, and automation) to Applied science, practical discipli ...
. Professional economists are expected to be familiar with these tools, while a minority specialize in econometrics and mathematical methods.
Women in economics
Harriet Martineau
Harriet Martineau (; 12 June 1802 – 27 June 1876) was an English social theorist often seen as the first female sociologist, focusing on racism, race relations within much of her published material.Michael R. Hill (2002''Harriet Martineau: Th ...
(1802-1876) was a widely-read populariser of classical economic thought. Mary Paley Marshall (1850-1944), the first women lecturer at a British economics faculty, wrote ''The Economics of Industry'' with her husband Alfred Marshall
Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
. Joan Robinson
Joan Violet Robinson (''née'' Maurice; 31 October 1903 – 5 August 1983) was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics.
B ...
(1903-1983) was an important post-Keynesian
Post-Keynesian economics is a school of economic thought with its origins in ''The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Wei ...
economist. The economic historian Anna Schwartz
Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
(1915-2012) coauthored ''A Monetary History of the United States, 1867–1960
''A Monetary History of the United States, 1867–1960'' is a book written in 1963 by Nobel Memorial Prize in Economic Sciences, Nobel Prize–winning economist Milton Friedman and Anna J. Schwartz. It uses historical time series and economic anal ...
'' with Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
. Two women have received the Nobel Prize in Economics
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
: Elinor Ostrom
Elinor Claire "Lin" Ostrom (née Awan; August 7, 1933 – June 12, 2012) was an American Political science, political scientist and Political economy, political economist whose work was associated with New institutional economics, New Institutio ...
(2009) and Esther Duflo
Esther Duflo, FBA (; born 25 October 1972) is a French–American economist who is a professor of Poverty Alleviation and Development Economics at the Massachusetts Institute of Technology (MIT). She is the co-founder and co-director of the Ab ...
(2019). Five have received the John Bates Clark Medal
The John Bates Clark Medal is awarded by the American Economic Association to "that American economist under the age of forty who is adjudged to have made a significant contribution to economic thought and knowledge." The award is named after the ...
: Susan Athey
Susan Carleton Athey (born ) is an American economist. She is the Economics of Technology Professor in the School of Humanities and Sciences at the Stanford Graduate School of Business. Prior to joining Stanford, she has been a professor at Harva ...
(2007), Esther Duflo (2010), Amy Finkelstein
Amy Nadya Finkelstein (born November 2, 1973) is a professor of economics at the Massachusetts Institute of Technology (MIT), the co-director and research associate of the Public Economics Program at the National Bureau of Economic Research, and ...
(2012), Emi Nakamura
Emi Nakamura is a Canadian-American economist. She is the Chancellor's Professor of Economics at University of California, Berkeley.
Nakamura is a research associate and co-director of the Monetary Economics Program of the National Bureau of Ec ...
(2019) and Melissa Dell
Melissa Dell (born ) is a Professor of Economics at Harvard University. Her research interests include development economics, political economy, and economic history.
In 2014, the International Monetary Fund named Dell among the 25 Brightest Yo ...
(2020).
Women's authorship share in prominent economic journals reduced from 1940 to the 1970s, but has subsequently risen, with different patterns of gendered coauthorship. Women remain globally under-represented in the profession (19% of authors in the RePEc database in 2018), with national variation.
See also
* Critical juncture theory
Critical juncture theory focuses on critical junctures, i.e., large, rapid, discontinuous changes, and the long-term causal effect or historical legacy of these changes.
Critical junctures are turning points that alter the course of evolution of ...
* Economics terminology that differs from common usage
In any technical subject, words commonly used in everyday life acquire very specific technical meanings, and confusion can arise when someone is uncertain of the intended meaning of a word. This article explains the differences in meaning between ...
* Economic ideology
An economic ideology is a set of views forming the basis of an ideology on how the economy should run. It differentiates itself from economic theory in being normative rather than just explanatory in its approach, whereas the aim of economic the ...
* Economic policy
The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the e ...
* Economic union
An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production ...
* Free trade
Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econo ...
* Happiness economics
The economics of happiness or happiness economics is the theoretical, qualitative and quantitative study of happiness and quality of life, including positive and negative affects, well-being, life satisfaction and related concepts – typically t ...
* Humanistic economics
Humanistic economics is a distinct pattern of economic thought with old historical roots that have been more recently invigorated by E. F. Schumacher's Small Is Beautiful: Economics as if People Mattered (1973). Proponents argue for "persons-firs ...
*
* List of economics films
This is a list of economics films. Economic film is a genre of film concerned with economics, typically about business, investing, and finance. It covers both fictional and documentary films.
Fictional films
* ''99 Homes'' (2014)
* ''Adults i ...
* List of economics awards
This list of economics awards is an index to articles about notable awards for economics. The list is organized by region and country of the sponsoring organization, but awards may be given to economists from other countries.
General
Americas
...
* Socioeconomics
Socioeconomics (also known as social economics) is the social science that studies how economic activity affects and is shaped by social processes. In general it analyzes how modern society, societies social progress, progress, economic stagnation ...
General
* Glossary of economics
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
0–9
A
B
...
* Index of economics articles
This aims to be a complete article list of economics topics:
A
* Absence rate – Accountancy – Accounting reform – Actuary – Adaptive expectations – Adverse selection – Agent (economics) – Agent-based computational economics – A ...
* JEL classification codes
Articles in economics journals are usually classified according to JEL classification codes, which derive from the ''Journal of Economic Literature''. The ''JEL'' is published quarterly by the American Economic Association (AEA) and contains surv ...
for classifying articles in economics journals and books on economics by subject matter from 1886 to the present.
* Outline of economics
The following outline is provided as an overview of and topical guide to economics:
Economics – analyzes the production, distribution, and consumption of goods and services. It aims to explain how economies work and how economic agents ...
Notes
References
Further reading
*
*
*
*
*
External links
General information
*
Economic journals on the web.
Economics
at ''Encyclopædia Britannica
The (Latin for "British Encyclopædia") is a general knowledge English-language encyclopaedia. It is published by Encyclopædia Britannica, Inc.; the company has existed since the 18th century, although it has changed ownership various time ...
''
Economics A-Z.
Definitions from ''The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
''.
Economics Online
(UK-based), with drop-down menu
A drop-down list (abbreviated drop-down, or DDL; also known as a drop-down menu, drop menu, pull-down list, picklist) is a graphical control element, similar to a list box, that allows the user to choose one value from a list. When a drop-down ...
s at top, incl. Definitions.
Intute: Economics
Internet directory
A web directory or link directory is an online list or catalog of websites. That is, it is a directory on the World Wide Web of (all or part of) the World Wide Web. Historically, directories typically listed entries on people or businesses, and th ...
of UK universities.
Research Papers in Economics (RePEc)
Resources For Economists
: American Economic Association
The American Economic Association (AEA) is a learned society in the field of economics. It publishes several peer-reviewed journals acknowledged in business and academia. There are some 23,000 members.
History and Constitution
The AEA was esta ...
-sponsored guide to 2,000+ Internet resources from "Data" to "Neat Stuff", updated quarterly.
Institutions and organizations
Economics Departments, Institutes and Research Centers in the World
Organization For Co-operation and Economic Development (OECD) Statistics
United Nations Statistics Division
World Bank Data
American Economic Association
Study resources
*
*
Economics at About.com
* Economics textbooks on Wikibooks
Wikibooks (previously called ''Wikimedia Free Textbook Project'' and ''Wikimedia-Textbooks'') is a wiki-based Wikimedia project hosted by the Wikimedia Foundation for the creation of free content digital textbooks and annotated texts that any ...
MERLOT Learning Materials: Economics
: US-based database of learning materials
UK Economics Network's database of text, slides, glossaries and other resources
{{Use dmy dates, date=June 2018