Economics is concerned with helping individuals and society decide on the optimal allocation of our limited resources.
The fundamental problem of economics is said to be scarcity - the idea that wants (demand) is greater than the resources we have. The economy faces choices on
- What to produce? - Is it worth spending more on health care?
- How to produce? - Should we leave it to market forces or implement government regulations.
- For whom to produce? - How should we distribute resources, should we place higher income tax on the wealthiest in society?
How to manage the macro economy?
|Mass unemployment in the 1930s|
If economics can contribute to reducing unemployment, then it can make a significant improvement to economic welfare. For example, the mass unemployment of the 1930's great depression led to political instability and the rise of extremist political parties across Europe.
However, the problem is that economists may often disagree on the best solution to these challenges. For example, at the start of the great depression in 1930, leading economists in the UK Treasury suggested that the UK needed to balance the budget; i.e. higher taxes, lower unemployment benefits. But, this made the recession deeper and led to a fall in demand.
It was in the great depression that John Maynard Keynes developed his general theory of Employment, Income and Money. He argued that classical economics had the wrong approach for dealing with depressions. Keynes argued that the economy needed expansionary fiscal policy. - higher borrowing and government spending.
2. Overcoming Market Failure
|Market failure - stuck in traffic jam, breathing car fumes|
An economist can suggest policies to overcome these types of market failures. For example
Some topical issues economists are concerned with
Another area where economists have a role to play is in improving efficiency. For example economists may suggest supply side policies to improve the efficiency of an economy.
Economics is also important for an individual. For example, every decision we take involves an opportunity cost - which is more valuable working overtime or having more leisure time?
In recent years, behavioural economics has looked at the diverse range of factors that influence people's decisions. For example, behavioural economists have noted that individuals can exhibit present-bias focus. This means placing excess importance on the current time period and making decisions our future self may regret. This includes over-consumption of demerit goods like alcohol and tobacco and failure to save for a pension.
Efficiency v Equity
In classical economics, we often focus on maximising income and profit. However, this is a limited use of economics. Economics is also concerned with maximising overall economic welfare (how happy are people). Therefore economics will help offer choices between increasing output and reducing inequality.
In recent years, economists such as Gary Becker have widened the scope of economics to include everyday issues, such as crime, family and education and explained these social issues from an economic perspective. Becker places emphasis on the theory of rational choice. The idea that individuals weigh up costs and benefits.
See: Applying economics in daily life
Economics is important for many areas of society. It can help improve living standards and make society a better place. Economics is like science in that it can be used to improve living standards and also to make things worse. It partly depends on the priorities of society and what we consider most important.
Have Your say
Leave a comment, if you would like to make a suggestion on the importance of economics in your daily life.
What is Economics? Essay
652 Words3 Pages
Many people think that economics is about money. Well, to some extent this is true. Economics has a lot to do with money: with how much money people are paid; how much they spend: what it costs to buy various items; how much money firms earn; how much money there is in total in the economy. But despite the large number of areas in which our lives are concerned with money, economics is more than just the study of money.
It is concerned with:
· The production of goods and services: how much the economy produces; what particular combination of goods and services; how much each firm produces; what techniques of production they use; how many people they employ.
· The consumption of goods and services: how much the population as a…show more content…
There are three types of resources:
· Human resources: labour The labour force is limited both in number and in skills.
· Natural resources: land and raw materials The world’s land area is limited, as are its raw materials.
· Manufactures resources: capital
All inputs into production that have themselves been produced: e.g. factories, machines and tools.
One must bear in mind that our wants are virtually unlimited, while the resources available to satisfy these wants are limited. In other words when society demands more of a product than can actually be produced to fulfil those wants we have a problem of scarcity. An example of this would be the OPEC oil price shocks between 1973 and 1980. Yes, it is true that the price of oil rose and some individuals used substitutes but the economies of oil importing countries like Germany and Japan fell because OPEC now had more buying power since they had the control over a scarce resource. We can therefore think of oil as having become scarcer in economic terms when its price rose.
Earlier I stated that economics is concerned with consumption and production. We can look at it in the terms of demand and supply. It is simply the quantity of a good buyers wish to purchase at each conceivable price. Three factors determine demand:
· Willingness to pay
· Ability to pay
Whilst supply is the quantity of good sellers wish to sell at each conceivable price. Supply is