Economics

Economics is a social science concerned with how individuals, firms, and governments decide to use limited resources. The fundamental question is how to produce, distribute, and use goods and services when needs are many but resources are few. This condition is known as scarcity, and it forms the basis of every economic decision.

Economic analysis rests on the concept of opportunity cost: when a choice is made, the benefit of the next-best alternative that is foregone is lost. Economists use mathematical models, statistics, and experiments to measure how people respond to changes in prices, taxes, or income.

Main branches

Economics is commonly divided into two branches. Microeconomics examines the decisions of individuals, households, and firms, and how specific markets work, considering demand and supply. Macroeconomics looks at the economy as a whole: national output, unemployment, inflation, and money supply.

Market and price

In a typical market structure, prices emerge from the interaction of demand and supply. When prices rise, demand usually falls while supply increases, until an equilibrium point is reached. Markets do not always function smoothly; there are situations called market failures, such as monopoly, information asymmetry, and external effects like pollution that have no market price.

Economic policy

Governments influence the economy through two main tools: fiscal policy (taxation and government spending) and monetary policy (interest rates and money supply, typically controlled by the central bank). Stated objectives include price stability, steady growth, and job creation. These tools have trade-offs; for example, reducing inflation can sometimes raise unemployment in the short term.

Economic behavior and rationality

Some economic models depart from the idea of the rational person always calculating benefit. Behavioral economics uses psychology to explain departures from rational decision-making. There is also ongoing debate about how much economics can claim to be a predictive science, since controlled experiments are difficult at the level of national economies.