Econ What is Economics

What is economics? Many people use the words want and need interchangeably. How often do you think about what you want? How many times have you said “I need something”? When you say, “I need some new clothes,” are you stating a want or a real need? Economics deals with questions such as these. Economics is the study of how individuals, families, businesses, and societies use limited resources to fulfill their unlimited wants.

Typically the term “need” is used casually. When most people use the word, they really mean that they want something they do not have. Obviously, everyone needs certain things to survive. For example: food, clothing, and shelter. However, to economists, everything other than basic survival needs is considered a “want”. People want such items as new cars and new personal computers. What begins as a luxury or want, becomes to many people a necessity.

Economics is a social science concerned with the ways individuals and nations choose to use their scarce resources. Economists analyze how people spend their income and the effect this spending has on the economy. Economics is divided into two parts. Microeconomics is the branch of economic theory that deals with behavior and decision making by small units such as individuals and firms. Macroeconomics is that branch of economic theory dealing with the economy as a whole and decisions making by large units such as governments.

To economists, the word economy means all the activity in a nation that together affects the production, distribution, and use of goods and services. When studying a specific part of the economy, economists often formulate theories and gather data. The theories that economists use in their work are called economic models, which are simplified representations of the real world. Solutions that emerge from testing economic models often become the basis for actual decisions by private businesses and government agencies.

One purpose of economic models is to show visual representations of consumer, business, or other economic behavior. The production possibilities curve is an economic model that reveals opportunity cost. Most common economic model is a line graph explaining how consumers react to changes in the price of goods and services.

Economic models assume that some factors remain constant. Why are these constant-factor assumptions important? Economists realize that, in the real world, several things may be changing at once. Using a model holds everything steady except the variables assumed to be related. Economic models do not record every detail and relationship that exists about a problem to be studied. A model will show only the basic factors needed to analyze the problem at hand.

Much of the work of economists involves predicting how people will react in a particular situation. However, individual human behavior is not always predictable. As a result, economist’s predictive model may not apply under different conditions.

1) Chapter 2 Vocab
2) Read Chapter 2



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