In this post I will try to say what economics is – at least, as far as I understand it 😛 . The purpose of this piece is to be part of the set of posts for new readers – so feedback is very appreciated.
Economics aims to understand one thing, and one thing only. Scarcity. It is the study of scarcity, every concept in economics is based on scarcity. As a result, we should define scarcity:
Definition: Scarcity: A state where, when something is free, humans want more of it than is avaliable.
However, economists are even narrower than that. We don’t study why things are scarce persee, we don’t study how resources are formed or how people’s desires for these things evolve.
Economics is a specific type of social science. What we do study is:
Definition: Economics: The study of how humans/societies allocate scarce resources.
This is a definition of economics that ALL economists should agree on. Every type of economist will believe there are bits missing. But if we want to capture the essence of all schools of economics, this would be the fundamental nugget that binds them together.
Neo-classical economics (which is what I mystically perform 😉 ) makes a few more assumptions. These assumptions were mentioned and discussed here namely:
- They believe in methodological individualism – fundamentally when an economist analyses the economy he believes the whole is the sum of its parts.
- People have preferences.
- People act at the margin to maximise net “happiness” – fundamentally this suggests that make choices based on the associated additional costs and benefits associated with the action.
When these are introduced we get the concept of “opportunity cost” – as we are stating that actions are derived from individuals, not a social whole.
Definition: Opportunity cost: The “next best” alternative to your best choice in a situation.
In this case, the fact that there is an “opportunity cost”, and that people can recognise it implies that, in a situation people make a choice between their best and second best alternative.
If something happens, to reduce the desirability of the best alternative, the person may switch to their “second best”. This would be a person acting based on a change in incentives.
Definition: Incentives: Something that drives an individuals choice – outcome oriented as it relies on the idea of a “payoff”.
In this case the idea of “choice” is essential. Effectively, people make choices based on incentives. As a result, when studying the allocation of resources, we are looking at the choices of people who are allocating time, goods, etc. The allocation of these things that people provide will depend on the initial amount of things (endowment), their ability to trade, and the choices they make.
In the case of economics, people are driven to make choices to “satisfy their preferences” – as a result, this acts as the driver of their actions.
So in this case, economics is the study of:
Definition: Neoclassical economics: The study of the allocation of resources given scarcity, when humans makes choices to satisfy their preferences.
Now if I have made any horrendous errors – or if there is debate surrounding anything I’ve said, go for it in the comments.