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Interdisciplinary studies and cross-application There has been an increasing trend for ideas and methods from economics to be applied in wider contexts. Economic analysis focuses on decision making, and has been applied, with varying degrees of success, to various fields where people are faced with alternatives – education, marriage, health, law, crime, war, and religion. Public choice theory can apply to political science (see political economy, which has a variety of meanings) and sociology (see socioeconomics). Econophysics is an interdisciplinary research field, applying theories and methods originally developed within Physics in order to solve problems in Economics, usually those including uncertainties or stochastic elements and nonlinear dynamics. Information theory has been applied to economics since the work of Ronald Coase in the 1930s. However, with Herbert Simon and John von Neumann in the 1950s, it gathered a more specific formalism as part of game theory. This emphasizes that the decision-making process itself is costly. Areas of study in economics One of the main purposes is to understand how economies work, and what are the relations between the main economic players and institutions. Economics is usually divided into two main branches: Attempts to join these two branches or to refute the distinction between them have been important motivators in much of recent economic thought, especially in the late 1970s and early 1980s. Today, the consensus view is arguably that good macroeconomics has solid microeconomic foundations. In other words, its premises ought to have theoretical and evidential support in microeconomics. A few authors (for example, Kurt Dopfer and Stuart Holland) also argue that 'mesoeconomics', which considers the intermediate level of economic organization such as markets and other institutional arrangements, should be considered a third branch of economic study. Economics can also be divided into numerous subdisciplines that do not always fit neatly into the macro-micro categorization. These subdisciplines include: international economics, development economics, industrial organization, public finance, economic psychology, economic sociology, institutional economics and economic geography. Another division of the subject distinguishes positive economics, which seeks to predict and explain economic phenomena, from normative economics, which orders choices and actions by some criterion; such orderings necessarily involve subjective value judgments. There are also methodologies used by economists whose underlying theories are important. Finance has traditionally been considered a part of economics – as its body of results emerges naturally from microeconomics – but has today effectively established itself as a separate, though closely related, discipline. Economic language and reasoning Economics relies on rigorous styles of argument. Economic methodology has several interacting parts: 2) Behavioral equations are used to describe how an economic agent behaves. Much of the power of economics as a science comes from the ability to express mathematically the way people pursue incentives within constraints. Examples are such as those that show consumption, using consumption function, however this is often applied to many different fields of economics which is increasingly expanded as economics moves out of field traditionally associated with it. 3)The final type of equations are those of Equilbrum equations, which are used to show the point where variables reach a natural level directed by economic forces using systems of simultaneous equations. This is most commonly represented by typically neoclassical static supply and demand models. It is important to note that equilbrum models do not exist in dynamic economic models where variables often either orbit an equilbrum but never reach it, or simply are not equilbrum based. This article will refer to such models as formal models, although they are not formal in the sense of formal logic. Economists often formulate very simple models in order to define the impact of just one variant changing. This is called the "ceteris paribus"-assumption (All others equal), meaning that all other things are assumed not to change during the period of observation. Example: "If the price of movie tickets rises, ceteris paribus the demand for popcorn falls." However it is possible with the use of econometric method to determine one relationship while removing much of the noise caused by other variables. Formal modelling, which has been adapted to some extent by all branches of economics, is motivated by general principles of consistency and completeness. It is not identical to what is often referred to as mathematical economics; this includes, but is not limited to, an attempt to set microeconomics, in particular general equilibrium, on solid mathematical foundations. Some reject mathematical economics: The Austrian School of economics believes that anything beyond simple logic is often unnecessary and inappropriate for economic analysis. In fact, the entire empirical-deductive framework sketched in this section may be rejected outright by that school. However, the framework sketched here accurately represents the current predominant view of economics. Modern mainstream economics Mainstream economics begins with the premise that resources are scarce and that it is necessary to choose between competing alternatives. That is, economics deals with tradeoffs. With scarcity, choosing one alternative implies forgoing another alternative—the opportunity cost. The opportunity cost creates an implicit price relationship between competing alternatives. In addition, in both market oriented and planned economies, scarcity is often explicitly quantified by price relationships. Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources. Alfred Marshall in the late 19th century informally described economics as "the study of man in the ordinary business of life". Understanding choices by individuals and groups is central. Economists believe that incentives and desires play an important role in shaping decision making. Concepts from the Utilitarian school of philosophy are used as analytical concepts within economics, though economists appreciate that society may not adopt utilitarian objectives. One example of this is the idea of a utility function, which is assumed to represent how economic agents rank the choices given to them. The utility function ranks available choices from best to worst, and the agent gradually learns to choose the best-ranked choice in the feasible set of his alternatives. On a microeconomic level, some economists extend economic analysis to all personal decisions. An alternative can be thought of as a vector where the entries are answers not only to questions like "How many eggs should I buy?", but also "How many hours should I spend with my kids?", and "How long should I spend brushing my teeth?". Modern mainstream economics builds primarily on neoclassical economics, which began to develop in the late 1800s and models choices made in the allocation of scarce resources. Mainstream economics also acknowledges the existence of market failure and some insights from Keynesian economics. It looks to game theory and asymmetric information to solve problems on a microeconomic level. Many important insights on collective behaviour (for example, emergence of organizations) have been incorporated from institutional economics via new institutionalism. Alternative approaches The approach to economics that is dominant today is usually referred to as mainstream economics, and has developed primarily from neoclassical economics. The more specific definition this approach implies was captured by Lionel Robbins in 1932: "the science which studies human behaviour as a relation between scarce means having 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. Other schools of thought are called heterodox economics, including institutional economics, Marxist economics, socialism, and green economics. Famous schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, may be generally summarized as follows: Economics and ecology Another premise is that economics fits within a finite ecosystem where there are at least some abundant resources. For instance, when fuelling a fire, people are usually concerned with finding the wood, and not with finding the air to burn it with. Traditional economics explicitly does not deal with free abundant inputs – one criticism is that it often conflicts with ecology's view of what affects what. Ecological economics attempts to address this criticism by calculating the financial contribution of nature's services and by adding environmental considerations such as biodiversity to traditional list of human wants and needs. Green economics is a closely related field which views the human economy as a subset of the larger ecosystem. Alternative definitions of economics This section extends the discussion of the definition of Economics at the beginning of the article. Economics is the study of human choice behaviour. All of economics whether represented through articulation or empirically through mathematical means is essentially an analysis of the behaviour choices of human beings. Wealth definition The earliest definitions of political economy were simple, elegant statements defining it as the study of wealth. The first scientific approach to the subject was inaugurated by Aristotle, whose influence is still recognised today by the Austrian School, among others. Adam Smith, author of the seminal work The Wealth of Nations and regarded by some as the "father of modern economics," defines economics simply as "The science of wealth." Wealth was defined as the specialization of labour which allowed a nation to produce more with its supply of labour and resources. This definition divided Smith and Hume from previous definitions which defined wealth as gold. Hume argued that gold without increased activity simply serves to raise prices John Stuart Mill defined economics as "The practical science of production and distribution of wealth"; this definition was adopted by the Concise Oxford English Dictionary even though it does not include the vital role of consumption. For Mill, wealth is defined as the stock of useful things. Definitions in terms of wealth emphasize production and consumption. The accounting measures usually used measure the pay received for work and the price paid for goods, and do not deal with the economic activities of those not significantly involved in buying and selling (for example, retired people, beggars, peasants). For economists of this period, they are considered non-productive, and non-productive activity is considered a kind of cost on society. This interpretation gave economics a narrow focus that was rejected by many as placing wealth in the forefront and man in the background; John Ruskin referred to political economy as a "Bastard science, the science of getting riches." Welfare definition Later definitions evolved to include human activity, advocating a shift toward the modern view of economics as primarily a study of man and of human welfare, not of money. Alfred Marshall in his 1890 book Principles of Economics wrote, "Political Economy or Economics is a study of mankind in the ordinary business of Life; it examines the part of the individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being." The welfare definition was still criticized as too narrowly materialistic. It ignores, for example, the non-material aspects of the services of a doctor or a dancer. A theory of wages which ignored all those sums paid for immaterial services was incomplete. Welfare could not be quantitatively measured, because the marginal significance of money differs from rich to the poor (that is, $100 is relatively more important to the well-being of a poor person than to that of a wealthy person). Moreover, the activities of production and distribution of goods such as alcohol and tobacco may not be conducive to human welfare, but these scarce goods do satisfy innate human wants and desires. Marxist economics still focuses on a welfare definition. In addition, several critiques of mainstream economics begin from the argument that current economic practice does not adequately measure welfare, but only monetized activity, which is an inadequate approximation of welfare. Scarcity definition This definition allowed a potentially broader field of study, but it, too, has its critics. It is most amenable to those who consider economics a pure science, but others object that it reduces economics merely to a valuation theory. It ignores how values are fixed, prices are determined and national income is generated. It also ignores unemployment and other problems arising due to abundance. This definition cannot apply to such Keynesian concerns as cyclical instability, full employment, and economic growth. The focus on scarcity continues to dominate neoclassical economics, which, in turn, predominates in most academic economics departments. It has been criticized in recent years from a variety of quarters, including institutional economics and evolutionary economics and surplus economics. Value
Supply and demand
Price
Scarcity Neoclassical economics is characterised by maximization (leisure time, wealth, health, happiness - all commonly reduced to the concept of utility) subject to constraints. These constraints - or scarcity - inevitably define a trade-off. For example, one can have more money by working harder, but less time (there are only so many hours in a day, so time is scarce). One can have more radishes only at the expense of, for example, fewer carrots (you only have so much land on which to grow food - land is scarce). All economies in the world face scarcity. Scarcity is defined as: when the price is zero, the quantity demanded exceeds the quantity supplied. Price is a measure of relative scarcity. If all other market variables are held constant; When the price is rising, this indicates the commodity is becoming relatively more scarce. When the price is falling, this indicates the commodity is becoming relatively less scarce. Adam Smith considered, for example, the trade-off between time, or convenience, and money. He discussed how a person could live near town, and pay more for rent of his home, or live farther away and pay less, "paying the difference out of his convenience". Marginalism In marginalist economic theory, the price level is determined by the marginal cost and marginal utility. The price of all goods will be the cost of making the last one that people will purchase, and the price of all the employees in a company will be the cost of hiring the last one the business needs. Marginalism looks at decisions based on "the margins", what the cost to produce the next unit is, versus how much it is expected to return in profit. When the marginal return of an action reaches zero, the action stops. Marginal utility is how much more happiness or use a person receives from a purchase in contrast with buying less. Marginal rewards are often subject to diminishing returns: Less reward is obtained from more production or consumption. For example, the 10th bar of chocolate that a person consumes does not taste as good as the first, and so brings less marginal utility. Marginalism became increasingly important in economic theory in the late 19th century, and is a tool which is used to analyze how economic systems will react. Marginal cost of production divides costs into "fixed" costs which must be paid regardless of how many of a commodity are produced, and "variable costs". The marginal cost is the variable cost of the last unit. Marginalism states that when the profit from the next unit will be zero, that unit will not be produced. This is often termed the marginal revolution in economic thought. The marginalist theory of price level runs counter to the classical theory of price being determined by the amount of labour congealed in a commodity. Development of economic thought
Is economics a science? One of the marks of a science is the use of the scientific method and the ability to establish hypothesis and make predictions which can then be tested with data. Unlike natural scientists and in a way similar to what happens in other social sciences, economists are generally unable to test their theories due to its impracticality. Unlike the natural sciences, economics yields no natural laws or universal constants, so this has led some critics to argue economics is not a science, or at best, is just a soft science. However, many recognized people like the renowned philosopher of science Karl Popper, has argued that any system of theories which allows itself to be disproven is indeed scientific. It is also argued by many, that difficulty in proving many hypotheses can occur in the natural sciences too, not only in the social sciences. In general, economists reply that while this aspect presents serious difficulties, they do in fact test their hypotheses using statistical methods such as econometrics and data generated in the real world. Some have argued that difficulty in this estimation implies economics is not a soft science, the field simply lacks the controllability of other sciences, and thus has greater difficulty in gathering and establishing evidence. The field of experimental economics has seen efforts to test at least some predictions of economic theories in a simulated laboratory setting – an endeavour which earned Vernon Smith the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 2002. Criticisms of economic theory and practice Economics has been persistently criticized for its heavy reliance on unrealistic, unobservable, or unverifiable assumptions. Some people reply to this criticism by saying that the unrealistic assumptions of economics result from abstraction from unimportant details, and abstraction is necessary for knowledge of a complex real world. So, far from unrealistic assumptions detracting from the epistemic worth of economics, such assumptions are essential for economic knowledge. Denominating this explanation the abstractionist defence, and after clarifying abstraction, unrealistic assumptions and kindred notions, at least one study have shown that this abstractionist defence does not successfully rebut the position of those who criticize economics for its unrealistic assumptions. However, it is important to note that while one school does have a majority in the field, there is far from a consensus on all economic issues and multiple alternative fields claim to have more empirically justified insights. Economics is a field of study with various schools and currents of thought. As a result, as in many other fields, there exists a considerable distribution of opinions, approaches and theories. Some of these reach opposite conclusions or, due to the differences in underlying assumptions, contradict each other. Criticism on several topics in economics can be found elsewhere, in both general and specialized literature (for example, General equilibrium, Pareto efficiency, Marginalism, Behavioral finance, Behavioral economics, Keynesian economics, Monetarism, Endogenous growth theory, Comparative advantage, Kuznets curve, Laffer curve et al.). McCloskey critique Although the conventional way of connecting an economic model with the world is through econometric analysis, Professor Deirdre McCloskey cites many examples in which professors of econometrics were able to use the same data to both prove and disprove the applicability of a model's conclusions. She argues the vast efforts expended by economists on analytical equations is essentially wasted effort. Ethics and economics The relationship between economics and ethics is complex. Many economists consider normative choices and value judgements, like what needs or wants, or what is good for society, to be political or personal questions outside the scope of economics. Once a person or government has established a set of goals, however, economics can provide insight as to how they might best be achieved. Others see the influence of economic ideas, such as those underlying modern capitalism, to promote a certain system of values with which they may or may not agree. (See, for example consumerism and Buy Nothing Day.) According to some thinkers such as John Syko, a theory of economics is also, or implies also, a theory of moral reasoning. The premise of ethical consumerism is that one should take into account ethical and environmental concerns, in addition to financial and traditional economic considerations, when making buying decisions. Effect on society Some would go so far as to say that market forms and other means of distribution of scarce goods suggested by economics affect what people consider to be not just their "desires and wants" but also "needs" and "habits". Much of so-called economic "choice" is involuntary, certainly given the conditioning that people have to expect a certain quality of life. This leads to one of the most hotly debated areas in economic policy: namely, the effect and efficacy of welfare policies. Libertarians view this as a failure to respect economic reasoning. They argue that redistribution of wealth is morally and economically wrong. And socialists view it as a failure of economics to respect society. They argue that disparities of wealth should not have been allowed in the first place. This led to both 19th century labour economics and 20th century welfare economics before being subsumed into human development theory. The older term for economics, political economy, is still often used instead of economics, especially by certain economists such as Marxists. Use of this term often signals a basic disagreement with the terminology or paradigm of market economics. Political economy explicitly brings political considerations into economic analysis and is therefore openly normative, although this can be said of many economic recommendations as well, despite claims to being positive. Some mainstream universities (such as the University of Toronto and many in the United Kingdom) have a "political economy" department rather than an "economics" department. Marxist economics generally denies the trade-off of time for money. In the Marxist view, concentrated control over the means of production is the basis for the allocation of resources among classes. Scarcity of any particular physical resource is subsidiary to the central question of power relationships embedded in the means of production. See also Further reading General information Institutions and organizations Study resources Publications Miscellaneous ceb:Ekonomiks lo:ເສດຖະສາດ mg:Toe-Karena | |||||||||||||||||
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