Overview of Economics: What Is Economics and Who Cares?

What Is Economics and Who Cares?

Economics is the study, description, and analysis of the ways in which societies produce and distribute goods and services. Economics can be applied to ancient civilizations—the Greeks and Phoenicians had economies—and to modern societies at the national, state, and local levels. For instance, California has the largest economy of any state, while New York City has the largest of any U.S. city. Even a household has an economy (although this does not cover “home economics”). Any system for deciding what is produced, how is it produced, and who gets to consume it, whether it is the system of an entire planet—as in the global economy—or a defined segment of society, is an economy and can be understood in economic terms.

An Inexact Science?


Economics is the study, description, and analysis of the ways in which a society produces and distributes goods and services. In economics, the term goods and services refers to everything that is produced in the economy—all products and services, including government “services,” such as national defense and the prison system.

Economics is one of the social (as opposed to natural or physical) sciences, as are psychology and anthropology. Social sciences examine and explain human interaction. Because of this, the findings and knowledge produced by a social science generally cannot be as exact or predictable as those of a physical science, such as physics or chemistry.

For instance, if you put water in a saucepan on a stove, you know with certainty that it will boil when it reaches 212° Fahrenheit. But if you are the governor of a state and you raise the state sales tax, you cannot be certain about the effect it will have or be able to answer any of the following basic questions: How much money will the tax raise? In order to avoid the tax, will people take more of their business across the state line? Will they shop more often on the Internet, where there is no sales tax (yet)? Will companies in the state experience lower sales and generate lower corporate income taxes as a result?

Economics deals with these kinds of questions, but it seldom comes up with totally precise explanations or correct predictions.

Why? Because human behavior in the economic realm is as complex and mysterious as it is in any other sphere of life.

It's Not Perfect, but It Helps!

The good news, however, is that economics can tell us the likely results of a sales tax. In addition, as a scientific discipline, economics provides extremely useful analytical tools and frameworks for understanding human behavior in the areas of getting and spending money, which (let's face it) occupies the majority of most people's waking hours.

Economics deals with fundamental, often life-or-death issues. That is why economics is important. Its challenge lies in its mysteries: We don't know when the next expansion or recession will arrive. We don't know if a federal tax cut will help the economy grow. We don't know which new technologies should be encouraged and which ones won't pan out. And, tragically, we don't know how to overcome poverty, hunger, crime, and other evils rooted in economic reality. But economics is the branch of the social sciences most concerned with these matters, and is it the one that's well equipped to help us deal with them.

Economics provides a framework for understanding government policies, business developments, and consumer behavior here and abroad. It provides a rich context for making decisions in your business, professional, and financial life. The economy is to business as the ocean is to fish. It is the environment in which business operates. The more you know about this environment, the better you will function as a manager, analyst, and decision-maker.

Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

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