Introduction to Economics: Scarcity, Social Science, Microeconomics, and Macroeconomics

Fundamental Definition and Scope of Economics

  • Economics Defined: Economics is the social science that studies how people make decisions in the face of scarcity and the resulting impact of such decisions on both society as a whole and on the individual members therein.

  • Core Terms: Two of the most important terms within this definition are "social science" and "scarcity."

Economics as a Social Science

  • Definition of Social Science: A discipline is classified as a social science if its primary focus of study is how humans, either as individuals or as groups, behave and interact with each other.

  • Classification: Economics is a social science because it meets this defining criterion.

  • Other Social Science Disciplines:

    • Anthropology

    • Political science

    • Psychology

    • Sociology

  • Shared Commonality: The commonality among all of these varied disciplines is that the central subject of study is people.

  • Key Differences Among Social Scientists: Social scientists across these different disciplines differ from one another with respect to:

    • The types of questions about human behavior they choose to ask.

    • The motives for behavior that are assumed to be of most importance.

    • The methods or approaches used to model or analyze human behavior.

Scarcity and Tradeoffs

  • Primary Focus of Economists: Economists primarily focus on decisions that arise specifically as a result of scarcity.

  • Definition of Scarcity: Scarcity is a universal phenomenon that arises because resources are limited.

  • Universality: No society in history has ever had enough resources to satisfy all the desires of all of its people.

  • Nature of Tradeoffs:

    • As a result of scarcity, decision makers face tradeoffs.

    • A tradeoff occurs when acquiring more of one thing can often only be done at the expense of getting by with less of something else.

  • Context and Levels: Economists address tradeoffs in many different contexts and on many different levels.

Main Branches of Economics: Microeconomics and Macroeconomics

  • Basis of Division: Broadly, economics can be divided into microeconomics and macroeconomics based upon the level at which an issue is being studied.

  • Microeconomics:

    • Definition: The study of how individual decision makers behave and interact with each other.

    • Focus: Often focuses on how households and firms behave and interact with each other in markets.

  • Macroeconomics:

    • Definition: The study of the functioning and performance of a society's economy as a whole.

    • Focus: Often focuses on levels of and changes in aggregate measures.

    • Examples of Aggregate Measures:

    • Inflation rate

    • Unemployment rate

    • Gross domestic product (GDP) growth rate

  • Shared Objective: Both branches are concerned with decisions that people (as individuals or as a society) must make because of scarcity. What differentiates the branches is the level of study.

Interrelatedness of Microeconomics and Macroeconomics

  • Interconnected Nature: The issues being studied in both branches are quite often interrelated.

  • Fundamental Cause: The performance of a society's economy as a whole results from all of the individual decisions made by each distinct household and firm in the economy.

  • Macro-Micro Linkage Example:

    • Context: A macroeconomist might be concerned with measuring the unemployment rate and determining how a specific proposed public policy (e.g., an increase in the minimum wage) would impact this rate.

    • Micro-Level Requirement: To properly analyze this macro-level issue in a credible way, the researcher must be at least aware of the impact of the policy on the micro-level behavior of individual firms and workers in the economy's labor markets.