Economics

What is economics?

Economics is the study of how humans make decisions in the face of scarcity.^[1] Scarcity means that human wants for goods, services and resources exceed what is available.^[1] Because we can’t have everything, every choice involves giving something up. That is true for families, towns and whole nations.^[1]

Specialization and trade

One of the founding ideas of economics comes from Adam Smith’s The Wealth of Nations, published in 1776. Smith described a pin factory in which the work was split into 18 distinct tasks. One worker alone might make 20 pins in a day, but 10 workers, each specializing, could make 48,000.^[1]

Specialization only works with trade. Most people earn wages in one specialized job and use that money to buy the many things they don’t produce themselves. This is how modern economies function.^[1]

Two ways to look at an economy

• Microeconomics focuses on the actions of individual agents: households, workers and businesses. It asks questions like how families decide to spend their budgets, or which products a firm decides to make.^[2]
• Macroeconomics looks at the economy as a whole: growth in production, the number of unemployed people, and rising prices (inflation). It asks what determines the level of economic activity, and how many jobs are available.^[2]

A healthy economy, in macroeconomic terms, means growth in the standard of living, low unemployment and low inflation.^[2]

Who steers the economy?

Governments have two main sets of tools:^[2]

• Monetary policy is conducted by a nation’s central bank. It affects bank lending, interest rates and financial markets.
• Fiscal policy is decided by a nation’s legislature. It covers government spending and taxes.

Why study economics?

Understanding economics helps you take part in debates about budgets and regulations, judge the arguments people make about economic issues, and think clearly about big problems such as poverty and barriers to education.^[1]