What is economics? Definition and meaning

Economics is a social science that aims to describe the factors that determine the production, distribution, and consumption of goods and services, i.e. the economy. It is the study of how we choose to use resources.

Definitions of the term ‘economics’ can vary considerably, depending on people’s point of view. The classical definition is “Economics is the study of the use of scarce resources that have alternative uses.”

We call an economics expert an economist. Economists try to understand the economy and how it responds to various stimuli, such as when the central bank changes interest rates.

Economics is a science because it uses scientific methods to develop theories that help explain the behavior of people. It also helps explain the behavior of groups and organizations.

The Journal of Economic Literature Classification of Fields breaks down Economics into several fields (above). They include the core areas of mathematical and statistical methods as well as the many arenas in which the core methods are applied. (Data Source: American Economic Association)

The words ‘economy’ and ‘economics’ come from the Greek word ‘oikonomia’, which means ‘household management, thrift’. The Greek word ‘oikonomos’ means ‘steward, manager’. It comes from ‘oikos’, which means a ‘dwelling’.

According to the Macmillan Dictionary, economics is:

“The study of the way that goods and services are produced and sold and the way money is managed.”

Choices and Economics

Life is all about choices. However, people, companies and governments cannot have everything they want – what they are able to do is limited by both resources and time. We, therefore, have to choose from a range of available options.

Do I or you want more leisure time or to earn more money? Does a government want to raise expenditure on health or defense? Does a company reduce prices or increase spending on advertising to boost sales?

Economics examines how we come to these choices, and can inform policies in a wide range of areas, including health, transport, commerce, environment, defense, etc.

We live in a world with unlimited wants and limited resources. Economics is all about determining how to deal with these two features of ‘scarcity.’

Economics is all around us

Unlike Latin or Ancient Greek, economics is not something that we just read about in books. We all swim and wade in a pool of economics. Put simply; nobody can escape from it.

Every single human on this planet is an economic creature, naturally programmed to make economic decisions. We make the decisions without thinking, i.e., instinctively.

What is Economics
People need resources to fulfill their desires. These resources cannot be infinite. However, their desires can be infinite. We all need to make choices on how to use our scarce resources. Economists study these choices.

The School of Economics at the University of Nottingham in the UK writes on its website:

“Understanding why we do what we do is key to the economist’s role. It requires an appreciation of many related disciplines such as politics, mathematics, statistics, sociology and psychology. Blending these elements into a coherent and effective framework is what makes an economist that little bit special.”

Behavioral economics enriches the traditional economic model by incorporating psychological insights into human behavior, examining how emotional, cognitive, and social factors influence the economic decisions of individuals and institutions.

It all started with Adam Smith

Modern economics started with a Scottish pioneer of political economy, who was also a moral philosopher, Adam Smith (1723-1790), with the publication of his book An Inquiry into the Nature and Causes of the Wealth of Nations.

His publication was the first comprehensive defense of the free market. Even today, it still has considerable influence on current economic thinking globally.

Central to Mr. Smith’s work was the idea that the market, while seemingly chaotic, is in fact guided to produce the right quantities and variety of goods and service – what he called the ‘invisible hand’.

When a certain product is scarce and in demand, there will be great incentives within the economy to produce more of it. If there is a surplus, the incentives will subsequently influence people to produce less of it.

Most economist today see Adam Smith as the ‘father of modern economics’.

Macroeconomics and microeconomics

Economics is a vast field, which we break down into dozens of different divisions. Its two main branches are macroeconomics and microeconomics.

Macroeconomics – this branch examines the whole economy, i.e., aggregate economy, and how certain factors such as interest rates affect it..

Microeconomics – studies how households, individuals, and businesses within an economy allocate limited resources. Imagine using a microscope to look at each of the tiny components that make up the whole economy.

According to the American Economic Association:

“Economics includes the study of labor, land, and investments, of money, income, and production, and of taxes and government expenditures. Economists seek to measure well-being, to learn how well-being may increase over time, and to evaluate the well-being of the rich and the poor.”

Austrian School of Economics

The Austrian School of Economics, which was founded by Carl Menger (1840-1921) and is extremely influential among modern economists, focuses on the concept of methodological individualism and is against the state intervening in the economy.

The Austrian economic school of thought believes the market itself can find the best way to proceed. It challenges the mathematical models that economists use when trying to make predictions.

Not long after the Russian Revolution, Austrian Economists predicted the eventual collapse of the communist economic model, which they described as unsustainable.

Organizational economics is the study of how we create and develop organizations and how they affect growth.

Economics comes from “oikonomia” (Greek)

From the Greek word “oikonomia” (household management), there are many English derivative words, including “economics.” Let’s have a look at them, their meanings, and how we can use them in a sentence:

  • Economist (Noun)

An expert in economics.
Example: “The Nobel Prize-winning economist gave a lecture on market dynamics.”

  • Economics (Noun)

The branch of knowledge concerned with the production, consumption, and transfer of wealth.
Example: “She decided to major in economics to understand global financial systems better.”

  • Economy (Noun)

The state of a country or region in terms of the production and consumption of goods and services and the supply of money.
Example: “The economy has been growing at a steady pace for several quarters now.”

  • Econometrics (Noun)

The application of statistical methods to economic data to give empirical content to economic relationships.
Example: “He used econometrics to analyze the impact of tax policies on consumer spending.”

  • Econometrician (Noun)

A person who uses statistical methods to study economic data.
Example: “The econometrician presented her research on the relationship between education and income.”

  • Economic (Adjective)

Relating to the economy or economics.
Example: “The government announced several economic measures to tackle the recession.”

  • Economical (Adjective)

Giving good value or service in relation to the amount of money, time, or effort spent.
Example: “Using LED bulbs is more economical in the long run due to their energy efficiency.”

  • Econometric (Adjective)

Using statistics and mathematical methods to describe economic systems.
Example: “Econometric models are essential for forecasting future economic trends.”

  • Uneconomic (Adjective)

Not economically viable; not making efficient use of resources.
Example: “Operating the old factory has become uneconomic due to the high cost of maintenance.”

  • Economically (Adverb)

In a way that relates to economics or finance.
Example: “The country is performing economically better this year compared to last.”

  • Economize (Verb)

Spend less; reduce one’s expenses.
Example: “We need to economize where we can to save for our vacation.”

  • Economizing (Gerund/Verb)

The action of reducing the amount of money, time, or resources that is spent on something.
Example: “Economizing on office supplies helped the company improve its bottom line.”

Video – What is Economics?

This video, from our YouTube partner channel – Marketing Business Network – explains what ‘Economics’ is using simple and easy-to-understand language and examples.