Many of you will have heard economics being mentioned in the news, along side terms such as GDP, growth, inflation, deflation, interest rates and other phrases which seem "financial" in nature. But what is economics and why should you care?

Economics is the science of scarcity.

Scarcity is the excess of human wants (demand) over what can be produced (supply), and is the fundamental economic problem.

There are infinite wants, and these differ depending on the circumstances of a particular individual or country. However, there are finite means of satisfying these because the world has a limited number of resources.

Scarcity influences the decisions of all individuals, businesses, and countries, and economics is the study of these decisions. Economics studies anything to do with satisfying human wants, including factors such as the actions of consumers, producers and governments.

Understanding economic concepts is a valuable addition to your commercial awareness toolkit, because it allows you to critically analyse the actions of these parties, and use this analysis in job applications, interviews, and even in the job itself.

Economic Models

A key purpose of studying economics is to explain and predict the outcome of certain events through the creation of models, which are hypotheses based upon economists' observations.

Models include a number of assumptions, because it is impossible to replicate every single factor which affects an outcome. Factors which are not included in a model are assumed to be constant i.e. to not have changed. This is known as the ceteris paribus assumption, which in Latin means “other things being equal”.

Economic models can be used for the benefit of a country, or for the benefit of an industry or a particular business, and the success of a model is determined by how well it can explain an economic phenomenon or predict an economic outcome.

Macro and Micro Economics

Economics is divided into two main branches; macro and micro.

Macroeconomics is concerned with the economy as a whole. It deals with things such as aggregate demand (the demand of a whole economy), aggregate supply (the supply of a whole economy), and the overall price, employment, and output levels of an economy. Generally speaking, the macroeconomic aims of any country are:

1. Growth - to increase output (Gross Domestic Product, or GDP, which we’ll discuss this later);
2. Low inflation - inflation is the general rise in prices of goods and services over time. If inflation is too high, it might outstrip any GDP / wealth growth, meaning citizens are worse off;
3. Full employment - the full use of all resources (including labour) to produce goods and services; and
4. Stability - avoiding fluctuations or shocks to the economy, and keeping production, employment, inflation, and growth (amongst other things) stable.

Microeconomics is concerned with the individual parts of the economy, and deals with things such as the demand, supply, and price levels in particular industries, as well as the interrelationships between various parts of the economy. Generally speaking, the study of microeconomics has 2 main aims - efficiency and equity.

1. ‍Efficiency relates to the optimal allocation of resources to achieve the maximum possible satisfaction from those resources and, related to this, production at the lowest possible cost;
2. Equity relates to how resources are distributed in society (not to be confused with “equity” or “equities” in other contexts - such as capital markets, which are discussed elsewhere on this website). Microeconomics may model the impact of certain market structures on the distribution of resources, and whether those structures can be changed to achieve a fairer distribution of resources; what constitutes fair will necessarily involve a value judgement.

Finally, since the whole of an economy is the sum of its parts, microeconomics is to some extent concerned with macroeconomic growth.

Conclusion

You should now have a good understanding of what economics is, and be ready to explore economic concepts in more detail. As discussed, economics is heavily concerned with models, and as such we will use models throughout this section to explain economic concepts more clearly.

It is recommended that you start with the microeconomics articles of this section, because it is important to understand the various parts of an economy before going on to examine it as a whole.

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