On the surface, the study of economics can seem arbitrary: the overcomplicated practice of analysing graphs and spreadsheets to reach vague conclusions. To somebody unversed in the basic tenets of the subject, it can seem like a heavily-theoretical and purely academic field that bears no real correlation to the society and world that we live in. This couldn’t be further from the case.
In this article I hope to clear up some of the misunderstandings that people without a formal education in economics may have. Clearer thinking about economic issues, especially in these difficult times, is something that is sorely needed!
“The Study of Man”
I have always maintained, and will continue to maintain, that economics is first and foremost the study of individuals. Specifically, it is the study of how and why human beings behave in their attempts to fulfil their needs and desires. Such an endeavour, of course, relies heavily on how we define both rational human behaviour and basic needs and desires.
Once economists have gleaned an adequate understanding of what motivates human beings, the task is to then create a structure in which resources can be most effectively allocated in accordance with people rationally pursuing their own self-interests. Once we understand how people generally behave in pursuit of their interests, we are then tasked with creating an in-theory economic structure that capitalizes on these natural behavioural patterns for maximum utilization of resources.
In this article I will look at two concepts: that of scarcity and the twin branches of economics, macroeconomics and microeconomics in the hope of clarifying the terms for the layperson.
Scarcity and Unlimited Desire
The term scarcity is one that’s misunderstood by many people. When economists use the term scarcity they are most often referring to the gap that exists between our infinite needs and wants and the resources that are available to satisfy them. Resources can be, for the sake of understanding, categorized into two camps: the resources of the individual (time, money, qualifications) and of a country (natural resources, labour force, services).
The interesting point for economists is how individuals form their values in relation to scarce resources. Because the sustenance that we need to satisfy our needs and wants is limited we must decide how best to use the resources that are available to us, and in doing so we, as a group and society, form particular values. It is fascinating to observe the difference in values of cultures when they are understood in the context of an economic system.
Macroeconomics and Microeconomics: A Misleading Differentiation
Macroeconomics refers to the study of how a nation, or more specifically a defined entity of individuals and organizations, manages its resources in order to create the maximum amount of wealth. Wealth is defined, simply, as an individual’s access to resources. The wealthier an individual is, the more access that individual has to finite resources and so is better able to fulfil their needs and wants.
Microeconomics is the study of the individual components that constitute a macro-economy. This includes the study of the behavioural patterns of individuals and businesses, as mentioned above. One of the most vital things to understand, especially in a market economy – the kind of economy that most Western countries to greater or lesser degree employ and that involves free trade and a minimum of government involvement – is that economists will use conclusions made at the micro-economic level to better understand how a nation’s economy will react to the allocation of resources at a macroeconomic scale. This is vital for anybody who follows economics to understand, and they should keep in mind the impact of the macro on the micro and vice versa.