What Is Economics?

Economics is widely defined as being the social science studying the production, consumption, and distribution of goods and services. Where this is a fair interpretation of the science, this definition is a bit narrow for my liking. My take is this: economics at its core is a science about decision-making and value. This is exceptionally broad, as it should be, as economics is universally applicable. In this discussion, the emphasis is going to be on microeconomics, because for all intents and purposes, macroeconomics is microeconomics on the aggregate.

Macroeconomics looks at the economy as a whole (an aggregation of the individuals) and focuses on topics such as: national income, international trade, unemployment, and inflation. It typically focuses on a national or international scale. Microeconomics is a small scale version looking at how individuals (people, firms, or markets) make decisions and behave within an overall economy. Microeconomics looks to see how individual economic agents perceive value or benefit and how they make decisions based on their assessments.

Microeconomics can be split into a number of different areas including: competitive markets, consumer demand theory, production theory, supply and demand, and game theory. At the center of all these areas, is the notion of constrained optimization. We are looking to see how we can make the best decision in order to maximize our utility (benefit) with the limitations that are imposed on us, or how we can get the best value. The initial question may not explicitly ask about getting the best value, however, ultimately any analysis is based on trying to get the most out of what we have available. An example would be if we are a firm, and are producing a good Y, we may be looking to analyze how many units of Y we should produce. In this scenario, our initial question may be how many units of Y should we produce. However, when we approach this, we perform our calculations in order to see what would make us the most money or give us the most benefit. We would look to see: what the demand in the market is based on our selling price, what changes would happen to the demand at different price points, what price point yields the highest amount of profit. Really the question is, how many units of Y should we produce in order to make the most money. Any economic agent is looking to make decisions that give them the most benefit according to their preferences. Firms are trying to make as much money as possible and individuals are trying to get the most bang for their buck.

This is why I consider economics to be about value and decision-making. When we break down the questions, we are looking how to maximize our utility (benefit) in a given situation. How do we get the greatest value, and what decision gets us there? If we’ve got two similar options, it becomes an exercise of how do we decide between the two, to maximize our benefit. Whether the decision is to buy or sell or trade, it doesn’t matter. The value determination, and the decision making is at the heart of the process. It seems very broad and general and quite frankly can be a little uncomfortable due to uncertainty at times, however it is an important notion to understand.

To summarize: economics can be stripped down into being the science dealing with value and decision making.