Economics

A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: macroeconomics, which concentrates on the behavior of the aggregate economy; and microeconomics, which focuses on individual consumers.

Economics is often referred to as "the dismal science". 

Two of the major approaches in economics are named the classical and Keynesian approaches. Classical economists believe that markets function very well, will quickly react to any changes in equilibrium and that a "laissez faire" government policy works best.

On the other hand, Keynesian economists believe that markets react very slowly to changes in equilibrium (especial to changes in prices) and that active government intervention is sometimes the best method to get the economy back into equilibrium. 

The Economist's Dictionary of Economics defines economics as "The study of the production, distribution and consumption of wealth in human society."

Saint Michael's College answers the question "What is Economics?" with the answer "Most simply put, economics is the study of making choices."

Indiana University - Purdue University Indianapolis answers the question "What is Economics?" with the explanation "Economics is a social science that studies human behavior. Economics has a unique method for analyzing and predicting individual behavior as well as the effects of institutions such as firms and governments, or clubs and religions."

Lastly Wikipedia defines economics as: "Economics is a social science that studies human behavior as a relationship between ends and scarce means which have alternative uses (Lionell Robbins, 1935). That is, economics is the study of the trade-offs involved when choosing between alternate sets of decisions."

If I were asked to provide an answer to the question of "What is Economics?" on a test, I'd probably write the following explanation:

"Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs, and desires".

demand (no excess supply and no shortages) for a given price point; at this point ,consumer utility and producer profits are maximized.  

Positive Economics

The study of economics based on objective analysis. Most economists today focus on positive economic analysis, which uses what is and what has been occurring in an economy as the basis for any statements about the future. Positive economics stands in contrast to normative economics, which uses value judgments. 

For example, a positive economic statement would be: "Increasing the interest rate will encourage people to save." This is considered a positive economic statement because it does not contain value judgments and its accuracy can be tested.

Most of the information we hear in the media today is a combination of positive and normative economic statements or theories. Because of this, investors should always be careful to separate out what is objective and what is subjective analysis. 

Normative Economics

A perspective on economics that incorporates subjectivity within its analyses. It is the study or presentation of "what ought to be" rather than what actually is. Normative economics deals heavily in value judgments and theoretical scenarios. It is the opposite of positive economics. 

Normative statements are often heard in the media because they tend to represent a theory or opinion rather than objective analysis. Normative economics is a valuable way to establish goals and generate new ideas, but it should not be used as a basis for policy decisions. 

An example of a normative economic statement would be, "We should cut taxes in half to increase disposable income levels". By contrast, a positive (or objective) economic observation would be, "Big tax cuts would help many people, but government budget constraints make that option infeasible." 

Free-Market Economy

Free-Market Economy, economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions (see Capitalism). Individuals are free to make economic decisions concerning their employment, how to use or accumulate capital, what expenditures to make, and whether to use their resources now or to save them for later consumption. The principles underlying free-market economies are based on laissez-faire (non-intervention by government) economics and can be traced to the 18th-century Scottish economist Adam Smith. According to Smith, individuals acting in their own economic self-interest will maximize the economic situation of society as a whole, as if guided by an “invisible hand.” In a free-market economy the government's function is limited to providing what are known as “public goods” and performing a regulatory role in certain situations.

Definition: A free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them. This is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities.

A command economy

A command economy, also called planned economy, is directly controlled by the government. The state owns all property and controls all resources including land, labor, and capital in a command economy. Allocations of resources, supply, and price are regulated through central planning by command economy experts. The command economy discourages individualistic profit motives and consumeristic needs. Under such a planned system, rewards, wages, and perks are disbursed based on the social value of the service performed. Certain sectors of the command economy get preferential allocation at the expense of others, which may lead to shortages in some essential goods. Absence of profit motives in a command economy precludes any need for competitiveness. This acts as a disincentive in individual contribution to collective efforts. Short-term advantages of a command economy contribute to its long-term failure.

A "Mixed" Economy

A "mixed" economy is a mix between socialism and capitalism. It is a hodgepodge of freedoms and regulations, constantly changing because of the lack of principles involved. A mixed-economy is a sign of intellectual chaos. It is the attempt to gain the advantages of freedom without government having to give up its power.

A mixed-economy is always in flux. The regulations never produce positive results, because they always force people to act against their own interests. When a particular policy fails, it is propped up by other regulations in the hopes that more control will produce better results. Sometimes the results are so destructive they must either be removed, or the people must be violently oppressed to make them accept it.

Market

Markets may be any of a variety of different systems, institutions, procedures, social relations and infrastructures whereby persons trade, and goods and services are exchanged, forming part of the economy.

In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services for money is a transaction. Market participants consist of all the buyers and sellers of a good who influences its price. This influence is a major study of economics and has given rise to several theories and models concerning the basic market forces of supply and demand. There are two roles in markets, buyers and sellers. The market facilitates trade and enables the distribution and allocation of resources in a society. Markets allow any tradable item to be evaluated and priced. A market emerges more or less spontaneously or is constructed deliberately by human interaction in order to enable the exchange of rights (cf. ownership) of services and goods.

An economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning. This is the opposite of a centrally planned economy, in which government decisions drive most aspects of a country's economic activity.

Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well-being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidizations.

While most developed nations today could be classified as having mixed economies, they are often said to have market economies because they allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy is clearly the system of choice in today's global marketplace, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations. 

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Demand curve Popyt

In economics, the demand curve can be defined as the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together.

An economic principle that describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.  

Think of demand as your willingness to go out and buy a certain product. For example, market demand is the total of what everybody in the market wants.

Businesses often spend a considerable amount of money in order to determine the amount of demand that the public has for its products and services. Incorrect estimations will either result in money left on the table if it’s underestimated or losses if it’s overestimated. 

Supply Podaż

A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph. This relates closely to the demand for a good or service at a specific price; all else being equal, the supply provided by producers will rise if the price rises because all firms look to maximize profits.

Supply and demand trends form the basis of the modern economy. Each specific good or service will have its own supply and demand patterns based on price, utility and personal preference. If people demand a good and are willing to pay more for it, producers will add to the supply. As the supply increases, the price will fall given the same level of demand. Ideally, markets will reach a point of equilibrium where the supply equals the

Equilibrium

The state in which market supply and demand balance each other and, as a result, prices become stable. Generally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium. 

The equilibrium price is where the supply of goods matches demand. When a major index experiences a period of consolidation or sideways momentum, it can be said that the forces of supply and demand are relatively equal and that the market is in a state of equilibrium.  

Price ceiling

A price ceiling is a government-imposed limit on how high a price can be charged on a product. For a price ceiling to be effective, it must differ from the free market price. In the graph at right, the supply and demand curves intersect to determine the free-market quantity and price.

A price ceiling can be set above or below the free-market equilibrium price. In the graph at right, the dashed line represents a price ceiling set above the free-market price, called a non-binding price ceiling. In this case, the ceiling has no practical effect. The government has mandated a maximum price, but the market price is established well below that.

Price Floor

A Price Floor is a government-imposed minimum price charged on a product or service. It differs from a price ceiling in that it artificially prevents the price from falling too low.

A price floor is a government- or group-imposed limit on how low a price can be charged for a product.] In order for a price floor to be effective, it must be greater than the equilibrium price.

Effect on the market

A price floor set above the market equilibrium price has several side-effects. Consumers find they must now pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before. As a result, they increase production.

Taken together, these effects mean there is now an excess supply (known as a surplus) of the product in the market. In order to maintain the price floor over the long term, the government may need to take action to remove that supply.

Macroeconomics

The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. 

Macroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals. The factors that are studied by macro and micro will often influence each other, such as the current level of unemployment in the economy as a whole will affect the supply of workers which an oil company can hire from, for example. 

Microeconomics

The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets (e.g. coffee industry). 

The field of economics is broken down into two distinct areas of study: microeconomics and macroeconomics. Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. People who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area.

5