Definitions of economics over timeThe earlier term for the discipline was ' political economy'.Since the late 19th century, it has commonly been called 'economics'., cited to the (''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; some reflect evolving views of the subject or different views among economists. philosopher (1776) defined what was then called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as: (1803), distinguishing the subject from its public-policy uses, defines it as the science ''of'' production, distribution, and consumption of . On the side, (1849) coined " " as an for , in this context, commonly linked to the pessimistic analysis of (1798).•
Thought regarding distribution of resources from antiquity through the physiocrats"Economic" writings date from earlier n, , , Indian subcontinent, , , and civilizations. Questions regarding distribution of resources are found throughout the writings of the n poet and several economic historians have described Hesiod himself as the "first economist". However, the word , the greek word from which the word economy derives, was used for issues regarding how to manage a household, rather than to refer to some normative societal system of distribution of resources, which is a much more recent phenomenon. Other notable writers from through to the include , , (also known as Kautilya), , , and . described 16th and 17th century scholastic writers, including Tomás de Mercado, , and , as "coming nearer than any other group to being the 'founders' of scientific economics" as to , , and 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 and modern capitalism in Europe. 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. , a group of 18th-century French thinkers and writers, developed the idea of the economy as a 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 '' '', which called for minimal government intervention in the economy. (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 economyThe publication of Adam Smith's '' '' 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 , including increased and , 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 " 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 , resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in (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. (1798) used the concept of to explain low living standards. , 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 has criticized Malthus's conclusions. While Adam Smith emphasized the production of income, (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 , 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 . Coming at the end of the classical tradition, (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'. 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 economicsMarxist (later, Marxian) economics descends from classical economics and it derives from the work of . The first volume of Marx's major work, '' '', was published in German in 1867. In it, Marx focused on the labour theory of value and the theory of surplus value which, he believed, explained the exploitation of labour by capital.•
Neoclassical economicsAt 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, 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 " " formed from about 1870 to 1910. The term "economics" was popularized by such neoclassical economists as as a concise synonym for "economic science" and a substitute for the earlier " political economy". This corresponded to the influence on the subject of mathematical methods used in the s. Neoclassical economics systematized 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 inherited from classical economics in favour of a 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 , which hypothesizes merely behaviour-based relations across persons. In , neoclassical economics represents incentives and costs as playing a pervasive role in shaping . An immediate example of this is the of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics. Neoclassical economics is occasionally referred as ''orthodox economics'' whether by its critics or sympathizers. Modern builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as , , analysis of and , and the neoclassical model of for analysing long-run variables affecting . Neoclassical economics studies the behaviour of individuals, households, and organizations (called economic actors, players, or agents), when they manage or use Scarcity, scarce 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 theory, 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 economicsKeynesian economics derives from John Maynard Keynes, in particular his book ''The General Theory of Employment, Interest and Money'' (1936), which ushered in contemporary 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" 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 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 and the work of Joan Robinson. New-Keynesian economics 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 economicsThe Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Milton Friedman and monetarists, market economies are inherently stable if the money supply does not greatly expand or contract. Ben Bernanke, 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."
Other schools and approachesOther 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 Austrian School, the Freiburg School, the School of Lausanne, post-Keynesian economics and the Stockholm school (economics), Stockholm school. Contemporary is sometimes separated into the Saltwater approach of those universities along the East Coast of the United States, Eastern and West coast of the United States, Western 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; , neoclassical economics, Keynesian economics, the neoclassical synthesis, monetarism, new classical economics, New Keynesian economics and the new neoclassical synthesis. In general, alternative developments include ecological economics, constitutional economics, institutional economics, evolutionary economics, dependency theory, structuralist economics, world systems theory, econophysics, econodynamics, feminist economics and biophysical economics.
Theoretical researchMainstream economic theory relies upon ''wikt:a priori, a priori'' quantitative model (economics), economic models, which employ a variety of concepts. Theory typically proceeds with an assumption of ''ceteris paribus'', 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 economics, neoclassical economic theory constitutes both the dominant or orthodox theoretical as well as General equilibrium theory, methodological framework, economic theory can also take the form of other Schools of economic thought, schools of thought such as in heterodox economics, heterodox economic theories. In , principal concepts include , marginalism, rational choice theory, opportunity cost, budget constraints, utility, and the theory of the firm. Early macroeconomic models focused on modelling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists, including new Keynesians, reformulated their models in microfoundations. The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in monetary theory, the quantity theory of money predicts that increases in the growth rate of the money supply increase , and inflation is assumed to be influenced by rational expectations. In development economics, 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. Sometimes an economic hypothesis is only ''qualitative economics, qualitative'', not ''quantitative''. Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, mathematical economics is the application of Mathematics, mathematical methods to represent theories and analyze problems in economics. Paul Samuelson's treatise ''Foundations of Economic Analysis'' (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 theorems that can conceivably be refuted by empirical data.
Empirical researchEconomic theories are frequently tested empirically, largely through the use of using economic data. The controlled experiments common to the physical sciences are difficult and uncommon in economics, and instead broad data is observational study, 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 is growing, and increasing use is being made of natural experiments. Statistics, Statistical methods such as regression analysis are common. Practitioners use such methods to estimate the size, economic significance, and statistical significance ("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 falsifiability, falsifiable 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 sets, and prior beliefs. Criticisms based on professional standards and non-Replication (statistics), replicability of results serve as further checks against bias, errors, and over-generalization, 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'' 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 models employing linear programming methods are quite common. Large amounts of data are run through computer programs to analyse the impact of certain policies; Minnesota IMPLAN Group, IMPLAN is one well-known example. Experimental economics has promoted the use of Scientific control, scientifically controlled experiments. This has reduced the long-noted distinction of economics from 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 has revealed that people reject unequal offers. In , psychologist Daniel Kahneman won the Nobel Prize in economics in 2002 for his and Amos Tversky's empirical discovery of several cognitive biases and heuristics in judgment and decision making, heuristics. Similar empirical testing occurs in neuroeconomics. 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
MicroeconomicsMicroeconomics examines how entities, forming a market structure, interact within a Market (economics), market to create a market system. These entities include private and public players with various classifications, typically operating under scarcity of tradable units and light government regulation. The item traded may be a tangible product (business), product such as apples or a Service (economics), service such as repair services, legal counsel, or entertainment. In theory, in a free market the Aggregation problem, aggregates (sum of) of ''quantity demanded'' by buyers and ''quantity supplied'' by sellers may reach economic equilibrium over time in reaction to price changes; in practice, various issues may prevent equilibrium, and any equilibrium reached may not necessarily be Equity (economics), morally equitable. For example, if the supply of healthcare services is limited by exogenous, external factors, the equilibrium price may be unaffordable for many who desire it but cannot pay for it. Various market structures exist. In perfect competition, perfectly competitive markets, no participants are large enough to have the market power 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 . Forms include monopoly (in which there is only one seller of a good), duopoly (in which there are only two sellers of a good), oligopoly (in which there are few sellers of a good), monopolistic competition (in which there are many sellers producing highly differentiated goods), monopsony (in which there is only one buyer of a good), and oligopsony (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 supply and demand, partial-equilibrium analysis (supply and demand). This method aggregates (the sum of all activity) in only one market. General equilibrium, 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 efficiencyIn microeconomics, is the conversion of factor of production, inputs into Output (economics), outputs. It is an economic process that uses inputs to create a good (economics), commodity or a service for trade, exchange or direct use. Production is a Stock and flow, flow and thus a rate of output per period of time. Distinctions include such production alternatives as for (food, haircuts, etc.) vs. Investment#In economics or macroeconomics, investment goods (new tractors, buildings, roads, etc.), Public good (economics), public goods (national defence, smallpox vaccinations, etc.) or private goods (new computers, bananas, etc.), and Guns versus butter model, "guns" vs "butter". Opportunity cost is the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between and choice". 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 versus nominal value (economics), real cost of Production-possibility frontier#Opportunity cost, output forgone, leisure, or anything else that provides the alternative benefit (utility). Inputs used in the production process include such primary factors of production as Labour (economics), labour services, Capital (economics), capital (durable produced goods used in production, such as an existing factory), and Land (economics), land (including natural resources). Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car. Economic efficiency measures how well a system generates desired output with a given set of inputs and available technology. 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, which is reached when no further change can make someone better off without making someone else worse off. The production–possibility frontier (PPF) is an expository figure for representing scarcity, cost, and efficiency. In the simplest case an economy 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 output, 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 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. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter. The slope of the curve at a point on it gives the trade-off#Examples from common life, trade-off 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, movement along the curve may indicate that the utility, choice 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 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 during a business cycle, business-cycle recession or economic organization of a country that discourages full use of resources. Being on the curve might still not fully satisfy allocative efficiency (also called Pareto efficiency) if it does not produce a mix of goods that consumers prefer over other points. Much in public policy 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."
SpecializationSpecialization is considered key to economic efficiency based on theoretical and empirical considerations. Different individuals or nations may have different real opportunity costs of production, say from differences in stock and flow, stocks of human capital per worker or capital (economics), capital/labor force, labour ratios. According to theory, this may give a 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 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 Returns to scale, scale and economies of agglomeration, agglomeration 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 (economics), service providers, and . Among each of these production systems, there may be a corresponding '' '' with different work groups specializing, or correspondingly different types of Capital (economics), capital equipment and differentiated Land (economics), land 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 prices of outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that (relatively) Production-possibility frontier#Opportunity cost, low-cost inputs go to producing low-cost outputs. In the process, aggregate output may increase as a invisible hand, by-product or by mechanism design, design. Such specialization of production creates opportunities for whereby resource owners benefit from trade 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 demandPrices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy. The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In , it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting market power, power. For a given market of a Good (economics and accounting), commodity, ''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). consumer theory, Demand theory describes individual consumers as rational choice theory, 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 (economics), wealth as the budget constraint, constraints on demand). Here, utility refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred. The law of demand 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 ceteris paribus, unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect). In addition, purchasing power from the price decline increases ability to buy (the income effect). Other factors can change demand; for example an increase in income will shift the demand curve for a normal good 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 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 (economics), model 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.
FirmsPeople 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 corporations, partnerships and trusts. According to Ronald Coase, 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 (when the average cost per unit declines as more units are produced) than individual market trading. In perfect competition, perfectly competitive markets studied in the theory of supply and demand, there are many producers, none of which significantly influence price. Industrial organization 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 applies analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as operations research and programming and from statistical methods such as regression analysis in the absence of certainty and perfect knowledge. A unifying theme is the attempt to Optimization (mathematics), 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 theoryUncertainty in economics is an unknown prospect of gain or loss, whether quantifiable as Risk#Risk and uncertainty, risk or not. Without it, household behaviour would be unaffected by uncertain employment and income prospects, financial market, financial and capital markets would reduce to exchange of a single financial instrument, instrument in each market period, and there would be no communications industry. Given its different forms, there are various ways of representing uncertainty and modelling economic agents' responses to it. Game theory is a branch of applied mathematics that considers Strategy#Strategies in game theory, strategic interactions between agents, one kind of uncertainty. It provides a mathematical microfoundation, foundation of industrial organization, discussed above, to model different types of firm behaviour, for example in a solipsistic industry (few sellers), but equally applicable to wage negotiations, Bargaining#Game theory, bargaining, Contract theory, contract design, and any situation where individual agents are few enough to have perceptible effects on each other. In , it has been used to model the strategies Agent (economics), 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 model and allows for incomplete information of actors. The field dates from the 1944 classic ''Theory of Games and Economic Behavior'' by John von Neumann and Oskar Morgenstern. It has significant applications seemingly outside of economics in such diverse subjects as formulation of nuclear strategies, Game theory#Philosophy, ethics, Game theory#Political science, political science, and evolutionary biology. Risk aversion may stimulate activity that in well-functioning markets smooths out risk and communicates information about risk, as in markets for insurance, commodity futures market, futures contracts, and financial instruments. Financial economics or simply finance describes the allocation of financial resources. It also analyses the pricing of financial instruments, the capital structure, financial structure of companies, the efficiency and fragility of financial markets, Financial crisis, financial crises, and related government policy or Financial regulation, regulation. Some market organizations may give rise to inefficiencies associated with uncertainty. Based on George Akerlof's "Market for Lemons" article, the paradigm 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 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, such that those at most risk are most likely to insure (say reckless drivers), and moral hazard, 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"). Moreover, attempting to reduce one problem, say adverse selection by mandating insurance, may add to another, say moral hazard. Information economics, which studies such problems, has relevance in subjects such as insurance, contract theory, contract law, mechanism design, monetary economics, and health economics, health care. Applied subjects include market and legal remedies to spread or reduce risk, such as warranties, government-mandated partial insurance, restructuring or bankruptcy law, inspection, and Regulatory economics, regulation for quality and information disclosure.
Market failureFile:Field Trip- water sampling.jpg, upright=1.15, Environmental scientist sampling water, alt=A woman takes samples of water from a river. The term " " encompasses several problems which may undermine standard economic assumptions. Although economists categorize market failures differently, the following categories emerge in the main texts. Critique of political economy, 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 Falsifiability, unfalsifiable.Ankarloo, - ''Nationalekonomiskrået En insider-outsiderteori om den nationalekonomiska disciplinen'' in ''Goda sanningar : debattklimatet och den kritiska forskningens villkor -'' 2010/2015, Nordic Academic Press Information asymmetries and incomplete markets may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies, as discussed above. Natural monopoly, 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 are one possible cause. Public goods 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 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 (economics), distortions 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 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 in . 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 Imperfect competition, deviating from perfect competition. Some specialized fields of economics deal in market failure more than others. The economics of the public sector is one example. Much environmental economics concerns externalities or "public bads". Policy options include regulations that reflect cost-benefit analysis or market solutions that change incentives, such as Emissions trading, emission fees or redefinition of property rights.
WelfareWelfare economics uses microeconomics techniques to evaluate well-being from Allocation of resources, allocation of factors of production, productive factors as to desirability and economic efficiency within an economy, often relative to competitive general equilibrium. It analyzes ''social welfare'', however Social welfare function, measured, in terms of economic activities of the individuals that compose the theoretical society considered. Accordingly, individuals, with associated economic activities, are the methodological individualism, 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.
MacroeconomicsMacroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down", that is, using a simplified form of General equilibrium, general-equilibrium theory. Such aggregates include measures of national income and output, national income and output, the unemployment rate, and price and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy. Since at least the 1960s, macroeconomics has been characterized by further integration as to microfoundations, micro-based modelling of sectors, including rational expectations, rationality of players, Efficient market hypothesis, efficient use of market information, and . 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 economic growth, growth of national income. Such factors include capital accumulation, Technological progress, technological change and labour force growth.
Growth''Growth economics'' studies factors that explain – the increase in output ''per capita'' 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 catch-up effect, converge at the same rates of growth. Much-studied factors include the rate of Investment (macroeconomics), investment, population growth, and Technological progress, technological change. These are represented in theoretical and empirical forms (as in the neoclassical growth model, neoclassical and endogenous growth model, endogenous growth models) and in growth accounting.
Business cycleThe economics of a depression were the spur for the creation of "macroeconomics" as a separate discipline. During the Great Depression of the 1930s, John Maynard Keynes authored a book entitled ''The General Theory of Employment, Interest and Money'' outlining the key theories of Keynesian economics. Keynes contended that aggregate demand 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, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. John Hicks' IS/LM model has been the most influential interpretation of ''The General Theory''. Over the years, understanding of the business cycle has branched into various research programmes, mostly related to or distinct from Keynesianism. The neoclassical synthesis refers to the reconciliation of Keynesian economics with neoclassical economics, stating that Keynesianism is correct in the short run but qualified by neoclassical-like considerations in the intermediate and long run. New classical macroeconomics, as distinct from the Keynesian view of the business cycle, posits market clearing with imperfect information. It includes Friedman's permanent income hypothesis on consumption and "rational expectations" theory, led by Robert Lucas, Jr., Robert Lucas, and real business cycle theory. In contrast, the New Keynesian economics, new Keynesian approach retains the rational expectations assumption, however it assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "Sticky (economics), sticky", 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.
UnemploymentThe 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 worker, 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 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 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 policyMoney is a ''means of final payment'' for goods in most price system economies, and is the unit of account 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, like language, useful to one largely because it is useful to others. In the words of Francis Amasa Walker, a well-known 19th-century economist, "Money is what money does" ("Money is ''that'' money does" in the original). As a medium of exchange, 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 (non-monetary exchange). Given a diverse array of produced goods and specialized producers, barter may entail a hard-to-locate double coincidence of wants as to what is exchanged, say apples and a book. Money can reduce the transaction cost 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, quantity theory of money, theory and evidence are consistent with a positive relationship running from the total money supply to the nominal value of total output and to the general price level. For this reason, management of the money supply is a key aspect of monetary policy.
Fiscal policyGovernments 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 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 Fiscal multiplier, 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 (economics), 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. 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 economicsPublic economics is the field of economics that deals with economic activities of a public sector, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programmes, effects on economic efficiency and income distribution of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of public choice theory, models public-sector behaviour analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats. Much of economics is positive economics, positive, seeking to describe and predict economic phenomena. Normative economics seeks to identify what economies ''ought'' to be like. Welfare economics is a normative branch of economics that uses microeconomics, microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income Distribution (economics), distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society.
International economicsInternational trade studies determinants of goods-and-services flows across international boundaries. It also concerns the size and distribution of . Policy applications include estimating the effects of changing tariff rates and trade quotas. International finance is a macroeconomic field which examines the flow of capital across international borders, and the effects of these movements on exchange rates. Increased trade in goods, services and capital between countries is a major effect of contemporary globalization.
Labor economicsLabor economics seeks to understand the functioning and dynamics of the Market (economics), markets for wage labor. 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 as Land (economics), land and Capital (economics), capital. There are theories which have developed a concept called human capital (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 economicsDevelopment economics examines economic aspects of the economic development process in relatively developing countries, low-income countries focusing on structural change, poverty, and . Approaches in development economics frequently incorporate social and political factors.
General criticisms"The dismal science" is a derogatory alternative name for economics devised by the Victorian era, Victorian historian Thomas Carlyle in the 19th century. It is often stated that Carlyle gave economics the nickname "the dismal science" as a response to the late 18th century writings of The Reverend Thomas Robert Malthus, who grimly predicted that starvation would result, as projected population growth exceeded 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, in which Carlyle argued for slavery, while Mill opposed it. In ''The Wealth of Nations'', Adam Smith addressed many issues that are currently also the subject of debate and dispute. Smith repeatedly attacks groups of politically aligned individuals who attempt to use their collective influence to manipulate a government into doing their bidding. In Smith's day, these were referred to as Political faction, factions, but are now more commonly called special interests, a term which can comprise international bankers, corporate conglomerations, outright oligopolies, monopolies, trade unions and other groups. Economics ''per se'', as a social science, is independent of the political acts of any government or other decision-making organization; however, many policymakers or individuals holding highly ranked positions that can influence other people's lives are known for arbitrarily using a plethora of economic concepts and rhetoric as vehicles to legitimize Political agenda, agendas and value systems, and do not limit their remarks to matters relevant to their responsibilities. The close relation of economic theory and practice with politics is a focus of contention that may shade or distort the most unpretentious original tenets of economics, and is often confused with specific social agendas and value systems. Notwithstanding, economics legitimately has a role in informing government policy. It is, indeed, in some ways an outgrowth of the older field of political economy. Some academic economic journals have increased their efforts to gauge the consensus of economists regarding certain policy issues in hopes of effecting a more informed political environment. Often there exists a low approval rate from professional economists regarding many public policies. Policy issues featured in one survey of American Economic Association economists include trade restrictions, social insurance for those put out of work by international competition, genetically modified foods, curbside recycling, health insurance (several questions), medical malpractice, barriers to entering the medical profession, organ donations, unhealthy foods, mortgage deductions, taxing internet sales, Wal-Mart, casinos, ethanol subsidies, and inflation targeting. Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of Macroeconomic policy, macroeconomic policies (monetary policy, monetary and fiscal policy) of the State (polity), state, are focus of contention and criticism. Deirdre McCloskey has argued that many empirical economic studies are poorly reported, and she and Stephen Ziliak argue that although McCloskey critique, her critique has been well-received, practice has not improved. This latter contention is controversial.
Criticisms of assumptionsEconomics 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. Examples of such assumptions include perfect information, profit maximization and rational choice theory, rational choices, axioms of neoclassical economics. Such criticisms often conflate neoclassical economics with all of contemporary economics. The field of information economics includes both mathematical-economical research and also , akin to studies in behavioural psychology, 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 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. Michael Dean Woodford, Michael Woodford noted in 2009 that in macroeconomics this was no longer the case, and that modelling had improved significantly in both theoretical rigour and empiricism, with a strong focus on testable quantitative work. In the 1990s, feminist critiques of neoclassical economic models gained prominence, leading to the formation of feminist economics. 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 alleged failures to account for: the selfish nature of actors (homo economicus); exogenous variable, exogenous tastes; the impossibility of utility comparisons; the exclusion of unpaid work; and the exclusion of class and gender considerations.
Related subjectsEconomics is one among several and has fields bordering on other areas, including economic geography, economic history, public choice, energy economics, JEL classification codes#Other special topics (economics) JEL: Z Subcategories, cultural economics, family economics and institutional economics. 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 economic efficiency, economically efficient, and to predict what the legal rules will be. A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities. Political economy is the interdisciplinary study that combines economics, law, and political science in explaining how political institutions, the political environment, and the economic system (capitalist, socialist, mixed) influence each other. It studies questions such as how monopoly, rent-seeking behaviour, and externalities should impact government policy. Historians 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 is a broad science, scientific subject area which includes topics related to energy supply and energy demand. Georgescu-Roegen reintroduced the concept of entropy in relation to economics and energy from thermodynamics, as distinguished from what he viewed as the mechanistic foundation of neoclassical economics drawn from Newtonian physics. His work contributed significantly to thermoeconomics and to ecological economics. He also did foundational work which later developed into evolutionary economics. The sociological subfield of economic sociology arose, primarily through the work of Émile Durkheim, Max Weber and Georg Simmel, as an approach to analysing the effects of economic phenomena in relation to the overarching social paradigm (i.e. modernity). Classic works include Max Weber's ''The Protestant Ethic and the Spirit of Capitalism'' (1905) and Georg Simmel's ''The Philosophy of Money'' (1900). More recently, the works of James Samuel Coleman, James S. Coleman, Mark Granovetter, Peter Hedstrom and Richard Swedberg have been influential in this field. in 1974 presented an economic theory of social interactions, whose applications included the family economics, family, charity, merit good, merit goods and multiperson interactions, and envy and hatred. He and Kevin M. Murphy, Kevin Murphy authored a book in 2001 that analyzed market behavior in a social environment.
ProfessionThe 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 and many colleges have a major, school, or department in which academic degrees are awarded in the subject, whether in the liberal arts, business, or for professional study. See Bachelor of Economics and Master of Economics. In the private sector, professional economists are employed as consultants and in industry, including banking and finance. Economists also work for various government departments and agencies, for example, the national treasury, central bank or List of national and international statistical services, National Bureau of Statistics. 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, though it is not a Nobel Prize. Contemporary economics uses mathematics. Economists draw on the tools of calculus, linear algebra, statistics, , and computer science. Professional economists are expected to be familiar with these tools, while a minority specialize in econometrics and mathematical methods.
See also* Critical juncture theory * Economics terminology that differs from common usage * Economic ideology * Economic policy * Economic union * Free trade * Happiness economics * Humanistic economics * List of academic fields#Economics * List of economics films * List of economics awards * Socioeconomics
General* Glossary of economics * Index of economics articles * JEL classification codes for classifying articles in economics journals and books on economics by subject matter from 1886 to the present. * Outline of economics
Further reading* Anderson, David A. (2019) ''Survey of Economics''. New York: Wort
Institutions and organizations
Study resources* *