Economics is the social science that studies the production, distribution, and consumption of goods and services. The word 'economics' is from the Greek for οἶκος (oikos: house) and νόμος (nomos: custom or law), hence "rules of the house(hold)."
Although discussions about production and distribution have a long history, economics in its modern sense is conventionally dated from the publication of Adam Smith's The Wealth of Nations in 1776. There Smith defines the subject in practical terms:
"Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or product for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign."
Smith referred to the subject as 'political economy', but that term was gradually replaced by 'economics' after 1870.
A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study ofchoice, as affected by incentives and resources.
Areas of economics may be divided or classified in various ways, including:
- microeconomics, macroeconomic, and econometrics
- positive economics ("what is") and normative economics ("what ought to be")
- fields and broader categories within economics.
Microeconomics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the supply and demand of goods and services.
Macroeconomics, on the other hand, involves the "sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national economic policies relating to these issues" and the effects of government actions (e.g., changing taxation levels) on them.Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'microfoundations'—i.e. based upon basic assumptions about micro-level behaviour.
The two main purposes of econometrics are to give empirical content to economic theory and to subject economic theory to potentially falsifying tests.For example, economic theory may hypothesize that a given demand curve slopes down. Econometric estimates can estimate the magnitude andstatistical significance of the relation.
Another division is between mainstream economics, including neoclassical economics, and heterodox economics, such as Austrian economics,institutional economics, and Marxian economics, which proceed from their own perspectives. Thus, in Marxian economics, the labour theory of value is a method for measuring the exploitation of labour in a capitalist society, rather than simply a theory of price.
Methods of economic analysis have been increasingly applied to fields that involve people (officials included) making choices in a social context, such as crime, education, the family, health, law, politics,religion, social institutions, and war.