Understanding the Subject Matter of Economics
Economics is a social science that examines how societies distribute scarce resources to meet human wants and needs. The subject matter of economics can be broadly divided into two approaches: traditional/classical and modern. We will go over each of these approaches and their topics in depth in this article.
A. Traditional/Classical Approach
The traditional/classical approach to economics is based on the works of economists such as Adam Smith, David Ricardo, and John Stuart Mill. This approach focuses on the overall study of the economy and its five primary subject matters: consumption, production, exchange, distribution, and public finance.
Consumption is the process of using goods and services to satisfy the wants and needs of humans. The study of consumption is important because it helps economists understand how people decide what to consume and how much to consume. Economists use models like the utility maximization model to explain how people make consumption decisions.
The process of creating goods and services is referred to as production. This subject matter is important because it helps economists understand how resources such as land, labor, and capital are used to produce goods and services. Economists explain how firms make production decisions using models like the production function.
The process of buying and selling goods and services in the market is referred to as the exchange. This subject matter is important because it helps economists understand how prices are determined in the market. Economists use models like supply and demand to explain how market prices are determined.
The process of allocating resources among various individuals and groups in society is called distribution. This subject matter is significant because it aids economists in understanding how income and wealth are distributed among individuals, as well as how goods and services are distributed across the globe. Economists measure income and wealth inequality using models such as the Lorenz curve and the Gini coefficient.
e. Public Finances:
The study of how governments raise revenue and spend it is known as public finance. This subject matter is important because it helps economists understand how governments can influence economic activity through taxation and spending. To explain the effects of government policies on the economy, economists use models such as the Laffer curve and the Keynesian multiplier.
B. Modern Approach
The modern approach to economics is based on the works of economists such as John Maynard Keynes, Milton Friedman, and Paul Samuelson. This approach focuses on the study of the economy at both the micro and macro levels, as well as its two main subject matters: microeconomics and macroeconomics.
a. Micro Economics:
The study of individual consumers, firms, and industries is called microeconomics. This subject matter is important because it helps economists understand how individuals and firms decide what to consume and produce, how they allocate resources, and how they interact in the market. Economists use models such as game theory and the theory of the firm to explain individual and firm behavior.
According to K.E Boulding, “Microeconomics is the study of particular firms, particular households, individual prices, wages, income, individual industries, particular commodities.”
According to Alfred Marshall, “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being.”
Paul Samuelson states, “Microeconomics is the study of how individual firms and households make decisions and how they interact with one another in markets.”
b. Macro Economics:
The study of the economy as a whole is referred to as macroeconomics. This subject matter is important because it helps economists understand the aggregate behavior of consumers, firms, and industries. Inflation, unemployment, economic growth, and international trade are all macroeconomic issues. To explain macroeconomic phenomena, economists use models such as the IS-LM model and the AD-AS model.
According to K.E Boulding, “Macroeconomics deals not with individual quantities as such but with an aggregate of those quantities, not with individual income but with the national income, not with individual prices but with the price level, not with individual output but with the national output.”
According to John Maynard Keynes, “Macroeconomics deals with the total economy or the aggregate economy, as a whole, rather than with individual markets or individual firms.”
According to Milton Friedman, “Macroeconomics is the study of the behavior of the economy as a whole, not just the behavior of individuals, households, and firms.”
In conclusion, the subject matter of economics is vast and covers various aspects of human life. The traditional/classical approach focuses on the overall study of the economy and its five primary subject matters: consumption, production, exchange, distribution, and public finance. The modern approach focuses on the study of the economy at the micro and macro levels, as well as its two main subject matters: microeconomics and macroeconomics.