Economics

Economics (/ɛkəˈnɒmɪks, iːkə-/)[1][2][3] is the social science that studies

the production, distribution, and consumption of goods and services.[4]

Economics focuses on the behaviour and interactions of economic agents

and how economies work. Microeconomics analyzes basic elements in
the economy, including individual agents and markets, their interactions,
and the outcomes of interactions. Individual agents may include, for
example, households, firms, buyers, and sellers. Macroeconomics
analyzes the entire economy (meaning aggregated production, Countries by real GDP growth rate in 2016.
consumption, savings, and investment) and issues affecting it, including Countries in red were in recession.

unemployment of resources (labour, capital, and land), inflation,

economic growth, and the public policies that address these issues
(monetary, fiscal, and other policies).See glossary of economics.

Other broad distinctions within economics include those between positive economics, describing "what is", and normative
economics, advocating "what ought to be"; between economic theory and applied economics; between rational and behavioural
economics; and between mainstream economicsand heterodox economics.[5]

Economic analysis can be applied throughout society, in business, finance, health care, and government. Economic analysis is
sometimes also applied to such diverse subjects as crime, education,[6] the family, law, politics, religion,[7] social institutions, war,[8]
science,[9] and the environment.[10]

Contents
The term and its various definitions
Microeconomics
Markets
Production, cost, and efficiency
Specialization
Supply and demand
Firms
Uncertainty and game theory
Market failure
Public sector
Macroeconomics
Growth
Business cycle
Unemployment
Inflation and monetary policy
Fiscal policy
International economics
Development economics
Economic systems
Practice
Theory
 Empirical investigation
Profession
Related subjects
History
Classical political economy
Marxism
Neoclassical economics
Keynesian economics
Chicago school of economics
Other schools and approaches
Agreements
Criticisms
General criticisms
Criticisms of assumptions
See also
Notes
References
Further reading
External links

The term and its various definitions

The discipline was renamed in the late 19th century, primarily due to Alfred Marshall, from "political economy" to "economics" as a
shorter term for "economic science". At that time, it became more open to rigorous thinking and made increased use of mathematics,
which helped support efforts to have it accepted as a science and as a separate discipline outside of political science and other social
sciences.[a][12][13][14]

A map of world economies by size of GDP (nominal) in USD,World Bank, 2014.[15]

There are a variety of modern definitions of economics; some reflect evolving views of the subject or different views among
economists.[16][17] Scottish philosopher Adam Smith (1776) defined what was then called political economy as "an inquiry into the
nature and causes of the wealth of nations", in particular as:

a branch of the science of a statesman or legislator [with the twofold objectives of providing] a plentiful revenue or
[18]
subsistence for the people ... [and] to supply the state or commonwealth with a revenue for the publick services.
Jean-Baptiste Say (1803), distinguishing the subject from its public-policy uses, defines it as the science of production, distribution,
and consumption of wealth.[19] On the satirical side, Thomas Carlyle (1849) coined "the dismal science" as an epithet for classical
economics, in this context, commonly linked to the pessimistic analysis of Malthus (1798).[20] John Stuart Mill (1844) defines the
subject in a social context as:

The science which traces the laws of such of the phenomena of society as arise from the combined operations of
mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other
object.[21]

Alfred Marshall provides a still widely cited definition in his textbook Principles of Economics (1890) that extends analysis beyond
wealth and from the societal to the microeconomic level:

Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it.
Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of
man.[22]

Lionel Robbins (1932) developed implications of what has been termed "[p]erhaps the most commonly accepted current definition of
the subject":[17]

Economics is a science which studies human behaviour as a relationship between ends and scarce means which have
alternative uses.[23]

Robbins describes the definition as not classificatory in "pick[ing] out certain kinds of behaviour" but rather analytical in "focus[ing]
attention on a particular aspect of behaviour, the form imposed by the influence of scarcity."[24] He affirmed that previous
economists have usually centred their studies on the analysis of wealth: how wealth is created (production), distributed, and
consumed; and how wealth can grow.[25] But he said that economics can be used to study other things, such as war, that are outside
its usual focus. This is because war has as the goal winning it (as a sought afterend), generates both cost and benefits; and, resources
(human life and other costs) are used to attain the goal. If the war is not winnable or if the expected costs outweigh the benefits, the
deciding actors (assuming they are rational) may never go to war (a decision) but rather explore other alternatives. We cannot define
economics as the science that studies wealth, war, crime, education, and any other field economic analysis can be applied to; but, as
the science that studies a particular common aspect of each of those subjects (they all use scarce resources to attain a sought after
end).

Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From
the 1960s, however, such comments abated as the economic theory of maximizing behaviour and rational-choice modelling expanded
the domain of the subject to areas previously treated in other fields.[26] There are other criticisms as well, such as in scarcity not
accounting for the macroeconomics of high unemployment.[27]

Gary Becker, a contributor to the expansion of economics into new areas, describes the approach he favours as "combin[ing the]
assumptions of maximizing behaviour, stable preferences, and market equilibrium, used relentlessly and unflinchingly."[28] One
commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to
the "choice process and the type of social interaction that [such] analysis involves." The same source reviews a range of definitions
included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the
texts treat. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which
[17]
the author believes economics is evolving, or should evolve.

Microeconomics
Markets
Microeconomics examines how entities, forming a market structure, interact
within a market to create a market system. These entities include private and
public players with various classifications, typically operating under scarcity
of tradable units and light government regulation. The item traded may be a
tangible product such as apples or a service such as repair services, legal
counsel, or entertainment.

In theory, in a free market the aggregates (sum of) of quantity demanded by

buyers and quantity supplied by sellers may reach economic equilibrium over
time in reaction to price changes; in practice, various issues may prevent
Economists study trade, production and
equilibrium, and any equilibrium reached may not necessarily be morally
consumption decisions, such as those that
equitable. For example, if the supply of healthcare services is limited by
occur in a traditional marketplace.
external factors, the equilibrium price may be unaffordable for many who
desire it but cannot pay for it.

Various market structures exist. In perfectly competitive markets, no

participants are large enough to have the market power to set the price of a
homogeneous product. In other words, every participant is a "price taker" as no
participant influences the price of a product. In the real world, markets often
experience imperfect competition.

Forms include monopoly (in which there is only one seller of a good), duopoly
Electronic trading brings together buyers
(in which there are only two sellers of a good), oligopoly (in which there are and sellers through anelectronic trading
few sellers of a good), monopolistic competition (in which there are many platform and network to create virtual
sellers producing highly differentiated goods), monopsony (in which there is market places. Pictured:São Paulo Stock
only one buyer of a good), and oligopsony (in which there are few buyers of a Exchange, Brazil.
good). Unlike perfect competition, imperfect competition invariably means
market power is unequally distributed. Firms under imperfect competition
have the potential to be "price makers", which means that, by holding a disproportionately high share of market power, they can
influence the prices of their products.

Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being
analysed does not affect other markets. This method of analysis is known as partial-equilibrium analysis (supply and demand). This
method aggregates (the sum of all activity) in only one market. General-equilibrium theory studies various markets and their
behaviour. It aggregates (the sum of all activity) across all markets. This method studies both changes in markets and their
interactions leading towards equilibrium.[29]

Production, cost, and efficiency

In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a
commodity or a service for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions
include such production alternatives as for consumption (food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads,
etc.), public goods (national defence, smallpox vaccinations, etc.) or private goods (new computers, bananas, etc.), and "guns" vs
"butter".

Opportunity cost is the economic cost of production: the value of the next best opportunity foregone. Choices must be made between
desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice".[30]
For example, if a baker uses a sack of flour to make pretzels one morning, then the baker cannot use either the flour or the morning to
make bagels instead. Part of the cost of making pretzels is that neither the flour nor the morning are available any longer, for use in
some other way. The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the
cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or
financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit
(utility).[31]

Inputs used in the production process include such primary factors of production as labour services, capital (durable produced goods
used in production, such as an existing factory), and land (including natural resources). Other inputs may include intermediate goods
used in production of final goods, such as the steel in a new car
.

Economic efficiency measures how well a system generates desired output with a given set of inputs and available technology.
Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced. A
widely accepted general standard is Pareto efficiency, which is reached when no further change can make someone better off without
making someone else worse off.

The production–possibility frontier (PPF) is an expository

figure for representing scarcity, cost, and efficiency. In the
simplest case an economy can produce just two goods (say
"guns" and "butter"). The PPF is a table or graph (as at the
right) showing the different quantity combinations of the
two goods producible with a given technology and total
factor inputs, which limit feasible total output. Each point
on the curve shows potential total output for the economy,
which is the maximum feasible output of one good, given a
feasible output quantity of the other good.

Scarcity is represented in the figure by people being willing

but unable in the aggregate to consume beyond the PPF
(such as at X) and by the negative slope of the curve.[32] If
production of one good increases along the curve,
production of the other good decreases, an inverse
relationship. This is because increasing output of one good
requires transferring inputs to it from production of the
other good, decreasing the latter. An example production–possibility frontierwith illustrative
points marked.
The slope of the curve at a point on it gives the trade-off
between the two goods. It measures what an additional unit
of one good costs in units forgone of the other good, an example of a real opportunity cost. Thus, if one more Gun costs 100 units of
butter, the opportunity cost of one Gun is 100 Butter. Along the PPF, scarcity implies that choosing more of one good in the
aggregate entails doing with less of the other good. Still, in a market economy, movement along the curve may indicate that the
choice of the increased output is anticipated to be worth the cost to the agents.

By construction, each point on the curve shows productive efficiency in maximizing output for given total inputs. A point inside the
curve (as at A), is feasible but represents production inefficiency (wasteful use of inputs), in that output of one or both goods could
increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high unemployment
during a business-cycle recession or economic organization of a country that discourages full use of resources. Being on the curve
might still not fully satisfy allocative efficiency (also called Pareto efficiency) if it does not produce a mix of goods that consumers
prefer over other points.

Much applied economics in public policy is concerned with determining how the efficiency of an economy can be improved.
Recognizing the reality of scarcity and then figuring out how to organize society for the most efficient use of resources has been
[33]
described as the "essence of economics", where the subject "makes its unique contribution."
Specialization
Specialization is considered key to
economic efficiency based on
theoretical and empirical considerations.
Different individuals or nations may
have different real opportunity costs of
production, say from differences in
stocks of human capital per worker or
capital/labour ratios. According to
theory, this may give a comparative
advantage in production of goods that
make more intensive use of the
relatively more abundant, thus relatively
cheaper, input.

Even if one region has an absolute

A map showing the maintrade routes for goods within late medieval Europe.
advantage as to the ratio of its outputs to
inputs in every type of output, it may
still specialize in the output in which it has a comparative advantage and thereby gain from trading with a region that lacks any
absolute advantage but has a comparative advantage in producing something else.

It has been observed that a high volume of trade occurs among regions even with access to a similar technology and mix of factor
inputs, including high-income countries. This has led to investigation of economies of scale and agglomeration to explain
[34]
specialization in similar but differentiated product lines, to the overall benefit of respective trading parties or regions.

The general theory of specialization applies to trade among individuals, farms, manufacturers, service providers, and economies.
Among each of these production systems, there may be a correspondingdivision of labour with different work groups specializing, or
correspondingly different types of capital equipment and differentiated land uses.[35]

An example that combines features above is a country that specializes in the production of high-tech knowledge products, as
developed countries do, and trades with developing nations for goods produced in factories where labour is relatively cheap and
plentiful, resulting in different in opportunity costs of production. More total output and utility thereby results from specializing in
production and trading than if each country produced its own high-tech and low-tech products.

Theory and observation set out the conditions such that market prices of outputs and productive inputs select an allocation of factor
inputs by comparative advantage, so that (relatively) low-cost inputs go to producing low-cost outputs. In the process, aggregate
output may increase as a by-product or by design.[36] Such specialization of production creates opportunities for gains from trade
whereby resource owners benefit fromtrade in the sale of one type of output for other, more highly valued goods. A measure of gains
from trade is the increased income levels that trade may facilitate.[37]

Supply and demand

Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market
economy.[38] The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced
and consumed. In microeconomics, it applies to price and output determination for a market with perfect competition, which includes
the condition of no buyers or sellers large enough to have price-setting power.

For a given market of a commodity, demand is the relation of the quantity that all buyers would be prepared to purchase at each unit
price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). Demand
theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes,
etc. A term for this is "constrained utility maximization" (with income and wealth as the constraints on demand). Here, utility refers
to the hypothesized relation of each individual consumer
A graph depicting Quantity on the X-axis and Price on the Y
-
for ranking different commodity bundles as more or less
axis
preferred.

The law of demand states that, in general, price and

quantity demanded in a given market are inversely related.
That is, the higher the price of a product, the less of it
people would be prepared to buy (other things unchanged).
As the price of a commodity falls, consumers move toward
it from relatively more expensive goods (the substitution
effect). In addition, purchasing power from the price
decline increases ability to buy (the income effect). Other
factors can change demand; for example an increase in
income will shift the demand curve for a normal good
outward relative to the origin, as in the figure. All
determinants are predominantly taken as constant factors of
demand and supply.

Supply is the relation between the price of a good and the The supply and demand model describes how prices vary
quantity available for sale at that price. It may be as a result of a balance between product availability and
represented as a table or graph relating price and quantity demand. The graph depicts an increase (that is, right-shift)
in demand from D1 to D2 along with the consequent
supplied. Producers, for example business firms, are
increase in price and quantity required to reach a new
hypothesized to be profit maximizers, meaning that they
equilibrium point on the supply curve (S).
attempt to produce and supply the amount of goods that
will bring them the highest profit. Supply is typically
represented as a function relating price and quantity
, if other factors are unchanged.

That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price
makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from a change in the
price of a productive input or a technical improvement. The "Law of Supply" states that, in general, a rise in price leads to an
expansion in supply and a fall in price leads to a contraction in supply. Here as well, the determinants of supply, such as price of
substitutes, cost of production, technology applied and various factors inputs of production are all taken to be constant for a specific
time period of evaluation of supply.

Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in
the figure above. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This is
posited to bid the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This
pushes the price down. The model of supply and demand predicts that for given supply and demand curves, price and quantity will
stabilize at the price that makes quantity supplied equal to quantity demanded. Similarly, demand-and-supply theory predicts a new
price-quantity combination from a shift in demand (as to the figure), or in supply
.

For a given quantity of a consumer good, the point on the demand curve indicates the value, or marginal utility, to consumers for that
unit. It measures what the consumer would be prepared to pay for that unit.[39] The corresponding point on the supply curve
measures marginal cost, the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is
determined by supply and demand. In aperfectly competitive market, supply and demand equate marginal cost and marginal utility at
equilibrium.[40]

On the supply side of the market, some factors of production are described as (relatively) variable in the short run, which affects the
cost of changing output levels. Their usage rates can be changed easily, such as electrical power, raw-material inputs, and over-time
and temp work. Other inputs are relatively fixed, such as plant and equipment and key personnel. In the long run, all inputs may be
adjusted by management. These distinctions translate to differences in the elasticity (responsiveness) of the supply curve in the short
and long runs and corresponding differences in the price-quantity change from a shift on the supply or demand side of the market.
Marginalist theory, such as above, describes the consumers as attempting to reach most-preferred positions, subject to income and
wealth constraints while producers attempt to maximize profits subject to their own constraints, including demand for goods
produced, technology, and the price of inputs. For the consumer, that point comes where marginal utility of a good, net of price,
reaches zero, leaving no net gain from further consumption increases. Analogously, the producer compares marginal revenue
(identical to price for the perfect competitor) against the marginal cost of a good, with marginal profit the difference. At the point
where marginal profit reaches zero, further increases in production of the good stop. For movement to market equilibrium and for
changes in equilibrium, price and quantity also change "at the margin": more-or-less of something, rather than necessarily all-or-
nothing.

Other applications of demand and supply include the distribution of income among the factors of production, including labour and
capital, through factor markets. In a competitive labour market for example the quantity of labour employed and the price of labour
(the wage rate) depends on the demand for labour (from employers for production) and supply of labour (from potential workers).
Labour economics examines the interaction of workers and employers through such markets to explain patterns and changes of wages
and other labour income, labour mobility, and (un)employment, productivity through human capital, and related public-policy
issues.[41]

Demand-and-supply analysis is used to explain the behaviour of perfectly competitive markets, but as a standard of comparison it can
be extended to any type of market. It can also be generalized to explain variables across the economy, for example, total output
(estimated as real GDP) and the general price level, as studied in macroeconomics.[42] Tracing the qualitative and quantitative effects
of variables that change supply and demand, whether in the short or long run, is a standard exercise in applied economics. Economic
theory may also specify conditions such that supply and demand through the market is an efficient mechanism for allocating
resources.[43]

Firms
People frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through firms. The
most obvious kinds of firms are corporations, partnerships and trusts. According to Ronald Coase, people begin to organize their
production in firms when the costs of doing business becomes lower than doing it on the market.[44] Firms combine labour and
capital, and can achieve far greater economies of scale (when the average cost per unit declines as more units are produced) than
individual market trading.

In perfectly competitive markets studied in the theory of supply and demand, there are many producers, none of which significantly
influence price. Industrial organization generalizes from that special case to study the strategic behaviour of firms that do have
significant control of price. It considers the structure of such markets and their interactions. Common market structures studied
, and monopoly.[45]
besides perfect competition include monopolistic competition, various forms of oligopoly

Managerial economics applies microeconomic analysis to specific decisions in business firms or other management units. It draws
heavily from quantitative methods such as operations research and programming and from statistical methods such as regression
analysis in the absence of certainty and perfect knowledge. A unifying theme is the attempt to optimize business decisions, including
unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market
conditions.[46]

Uncertainty and game theory

Uncertainty in economics is an unknown prospect of gain or loss, whether quantifiable as
risk or not. Without it, household behaviour
would be unaffected by uncertain employment and income prospects, financial and capital markets would reduce to exchange of a
single instrument in each market period, and there would be no communications industry.[47] Given its different forms, there are
various ways of representing uncertainty and modelling economic agents' responses to [48]
it.
Game theory is a branch of applied mathematics that considers strategic interactions between agents, one kind of uncertainty. It
provides a mathematical foundation of industrial organization, discussed above, to model different types of firm behaviour, for
example in an solipsistic industry (few sellers), but equally applicable to wage negotiations, bargaining, contract design, and any
situation where individual agents are few enough to have perceptible effects on each other. In behavioural economics, it has been
[49]
used to model the strategiesagents choose when interacting with others whose interests are at least partially adverse to their own.

In this, it generalizes maximization approaches developed to analyse market actors such as in the supply and demand model and
allows for incomplete information of actors. The field dates from the 1944 classic Theory of Games and Economic Behavior by John
von Neumann and Oskar Morgenstern. It has significant applications seemingly outside of economics in such diverse subjects as
formulation of nuclear strategies, ethics, political science, and evolutionary biology.[50]

Risk aversion may stimulate activity that in well-functioning markets smooths out risk and communicates information about risk, as
in markets for insurance, commodity futures contracts, and financial instruments. Financial economics or simply finance describes
the allocation of financial resources. It also analyses the pricing of financial instruments, the financial structure of companies, the
efficiency and fragility offinancial markets,[51] financial crises, and related government policy orregulation.[52]

Some market organizations may give rise to inefficiencies associated with uncertainty. Based on George Akerlof's "Market for
Lemons" article, the paradigm example is of a dodgy second-hand car market. Customers without knowledge of whether a car is a
"lemon" depress its price below what a quality second-hand car would be.[53] Information asymmetry arises here, if the seller has
more relevant information than the buyer but no incentive to disclose it. Related problems in insurance are adverse selection, such
that those at most risk are most likely to insure (say reckless drivers), and moral hazard, such that insurance results in riskier
behaviour (say more reckless driving).[54]

Both problems may raise insurance costs and reduce efficiency by driving otherwise willing transactors from the market ("incomplete
markets"). Moreover, attempting to reduce one problem, say adverse selection by mandating insurance, ma
y add to another, say moral
hazard. Information economics, which studies such problems, has relevance in subjects such as insurance, contract law, mechanism
design, monetary economics, and health care.[54] Applied subjects include market and legal remedies to spread or reduce risk, such as
warranties, government-mandated partial insurance, restructuring or bankruptcy law, inspection, and regulation for quality and
information disclosure.[55][56]

Market failure
The term "market failure" encompasses several problems which may
A smokestack releasing smoke
undermine standard economic assumptions. Although economists categorize
market failures differently, the following categories emerge in the main
texts.[b]

Information asymmetries and incomplete markets may result in economic

inefficiency but also a possibility of improving efficiency through market,
legal, and regulatory remedies, as discussed above.

Natural monopoly, or the overlapping concepts of "practical" and "technical"

monopoly, is an extreme case of failure of competition as a restraint on Pollution can be a simple example of
producers. Extreme economies of scale are one possible cause. market failure. If costs of production are
not borne by producers but are by the
Public goods are goods which are under-supplied in a typical market. The environment, accident victims or others,
defining features are that people can consume public goods without having to then prices are distorted.
pay for them and that more than one person can consume the good at the same
time.
Externalities occur where there are significant social costs or benefits from production or consumption that are not reflected in market
prices. For example, air pollution may generate a negative externality, and education may generate a positive externality (less crime,
etc.). Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise
promote the purchase of goods that have positive externalities in an effort to correct the price distortions caused by these
externalities.[57] Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment for changes of
.[58]
equilibrium due to a shift in demand or supply

In many areas, some form of price stickiness is postulated to account for quantities, rather than prices, adjusting in the short run to
changes on the demand side or the supply side. This includes standard analysis of the business cycle in macroeconomics. Analysis
often revolves around causes of such price stickiness and their implications for reaching a hypothesized long-run equilibrium.
Examples of such price stickiness in particular markets include wage rates in labour markets and posted prices in markets deviating
from perfect competition.

Some specialized fields of economics deal in market failure more than others.
A woman takes samples of water from a
The economics of the public sector is one example. Much environmental
river.
economics concerns externalities or "public bads".

Policy options include regulations that reflect cost-benefit analysis or market

solutions that change incentives, such as emission fees or redefinition of
property rights.[59]

Public sector
Public finance is the field of economics that deals with budgeting the revenues Environmental scientistsampling water
and expenditures of a public sector entity, usually government. The subject
addresses such matters astax incidence (who really pays a particular tax), cost-
benefit analysis of government programmes, effects on economic efficiency and income distribution of different kinds of spending
and taxes, and fiscal politics. The latter, an aspect of public choice theory, models public-sector behaviour analogously to
[60]
microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats.

Much of economics is positive, seeking to describe and predict economic phenomena. Normative economics seeks to identify what
economies ought to be like.

Welfare economics is a normative branch of economics that uses microeconomic techniques to simultaneously determine the
allocative efficiency within an economy and the income distribution associated with it. It attempts to measure social welfare by
.[61]
examining the economic activities of the individuals that comprise society

Macroeconomics
Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down", that is, using a
simplified form of general-equilibrium theory.[62] Such aggregates include national income and output, the unemployment rate, and
price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of
monetary policy and fiscal policy.

Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modelling of sectors,
including rationality of players, efficient use of market information, and imperfect competition.[63] This has addressed a long-
[64]
standing concern about inconsistent developments of the same subject.

Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include
capital accumulation, technological change and labour force growth.[65]
Growth
Growth economics studies factors that
explain economic growth – the increase
in output per capita of a country over a
long period of time. The same factors
are used to explain differences in the
level of output per capita between
countries, in particular why some
countries grow faster than others, and
whether countries converge at the same
rates of growth.

Much-studied factors include the rate of

investment, population growth, and
technological change. These are
represented in theoretical and empirical
forms (as in the neoclassical and
endogenous growth models) and in
growth accounting.[66]

Business cycle
The economics of a depression were the
spur for the creation of
"macroeconomics" as a separate
discipline field of study. During the
Great Depression of the 1930s, John
Maynard Keynes authored a book
entitled The General Theory of
Employment, Interest and Money
outlining the key theories of Keynesian
economics. Keynes contended that The circulation of money in an economyin a macroeconomic model.
aggregate demand for goods might be
insufficient during economic downturns,
leading to unnecessarily high
unemployment and losses of potential
output.

He therefore advocated active policy

responses by the public sector, including
monetary policy actions by the central
bank and fiscal policy actions by the
government to stabilize output over the
business cycle.[67] Thus, a central
conclusion of Keynesian economics is
that, in some situations, no strong A basic illustration of economic/business cycles.

automatic mechanism moves output and

employment towards full employment
levels. John Hicks' IS/LM model has been the most influential interpretation ofThe General Theory.
Over the years, understanding of thebusiness cycle has branched into variousresearch programmes, mostly related to or distinct from
Keynesianism. The neoclassical synthesis refers to the reconciliation of Keynesian economics with neoclassical economics, stating
that Keynesianism is correct in theshort run but qualified by neoclassical-like considerations in the intermediate andlong run.[68]

New classical macroeconomics, as distinct from the Keynesian view of the business cycle, posits market clearing with imperfect
information. It includes Friedman's permanent income hypothesis on consumption and "rational expectations" theory,[69] led by
Robert Lucas, and real business cycle theory.[70]

In contrast, the new Keynesian approach retains the rational expectations assumption, however it assumes a variety of market
failures. In particular, New Keynesians assume prices and wages are "sticky", which means they do not adjust instantaneously to
changes in economic conditions.[71]

Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians
see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are
needed because the "long run" may be very long.

Unemployment
The amount of unemployment in an
economy is measured by the
unemployment rate, the percentage of
workers without jobs in the labour force.
The labour force only includes workers
actively looking for jobs. People who
are retired, pursuing education, or
discouraged from seeking work by a
lack of job prospects are excluded from
the labour force. Unemployment can be
generally broken down into several
types that are related to different
causes.[72]

The percentage of theUS population employed, 1995–2012.

Classical models of unemployment
occurs when wages are too high for
employers to be willing to hire more workers. Wages may be too high because of minimum wage laws or union activity. Consistent
with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of
[72]
time needed to search for and find the job leads to a period of unemployment.

Structural unemploymentcovers a variety of possible causes of unemployment including a mismatch between workers' skills and the
skills required for open jobs.[73] Large amounts of structural unemployment can occur when an economy is transitioning industries
and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment
since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to
[74]
acquire new skills not just the short term search process.

While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when
growth stagnates. Okun's law represents the empirical relationship between unemployment and economic growth.[75] The original
[76]
version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.

Inflation and monetary policy

Money is a means of final paymentfor goods in most price system economies, and is the unit of account in which prices are typically
stated. Money has general acceptability, relative consistency in value, divisibility, durability, portability, elasticity in supply, and
longevity with mass public confidence. It includes currency held by the nonbank public and checkable deposits. It has been described
as a social convention, like language, useful to one largely because it is useful to others. In the words of Francis Amasa Walker, a
that money does" in the original).[77]
well-known 19th-century economist, "Money is what money does" ("Money is

As a medium of exchange, money facilitates trade. It is essentially a measure of value and more importantly, a store of value being a
basis for credit creation. Its economic function can be contrasted with barter (non-monetary exchange). Given a diverse array of
produced goods and specialized producers, barter may entail a hard-to-locate double coincidence of wants as to what is exchanged,
say apples and a book. Money can reduce the transaction cost of exchange because of its ready acceptability. Then it is less costly for
[78]
the seller to accept money in exchange, rather than what the buyer produces.

At the level of an economy, theory and evidence are consistent with a positive relationship running from the total money supply to
the nominal value of total output and to the general price level. For this reason, management of the money supply is a key aspect of
monetary policy.[79]

Fiscal policy
Governments implement fiscal policy to influence macroeconomic conditions by adjusting spending and taxation policies to alter
aggregate demand. When aggregate demand falls below the potential output of the economy, there is an output gap where some
productive capacity is left unemployed. Governments increase spending and cut taxes to boost aggregate demand. Resources that
have been idled can be used by the government.

For example, unemployed home builders can be hired to expand highways. Tax cuts allow consumers to increase their spending,
which boosts aggregate demand. Both tax cuts and spending have multiplier effects where the initial increase in demand from the
policy percolates through the economy and generates additional economic activity
.

The effects of fiscal policy can be limited by crowding out. When there is no output gap, the economy is producing at full capacity
and there are no excess productive resources. If the government increases spending in this situation, the government uses resources
that otherwise would have been used by the private sector, so there is no increase in overall output. Some economists think that
crowding out is always an issue while others do not think it is a major issue when output is depressed.

Sceptics of fiscal policy also make the argument of Ricardian equivalence. They argue that an increase in debt will have tobe paid for
with future tax increases, which will cause people to reduce their consumption and save money to pay for the future tax increase.
Under Ricardian equivalence, any boost in demand from tax cuts will be offset by the increased saving intended to pay for future
higher taxes.

International economics
International trade studies determinants of goods-
and-services flows across international
boundaries. It also concerns the size and
distribution of gains from trade. Policy
applications include estimating the effects of
changing tariff rates and trade quotas.
International finance is a macroeconomic field
which examines the flow of capital across
international borders, and the effects of these
movements on exchange rates. Increased trade in
List of countries by GDP (PPP) per capita in 2014.
goods, services and capital between countries is a
major effect of contemporary globalization.[80]
Development economics
The distinct field of development economics examines economic aspects of the economic development process in relatively low-
income countries focusing on structural change, poverty, and economic growth. Approaches in development economics frequently
incorporate social and political factors.[81]

Economic systems
Economic systems is the branch of economics that studies the methods and institutions by which societies determine the ownership,
direction, and allocation of economic resources. Aneconomic system of a society is the unit of analysis.

Among contemporary systems at different ends of the organizational spectrum are socialist systems and capitalist systems, in which
most production occurs in respectively state-run and private enterprises. In between are mixed economies. A common element is the
interaction of economic and political influences, broadly described as political economy. Comparative economic systems studies the
relative performance and behaviour of different economies or systems.[82]

The U.S. Export-Import Bank defines a Marxist–Leninist state as having a centrally planned economy.[83] They are now rare;
examples can still be seen inCuba, North Korea and Laos.[84]

Practice
Contemporary economics uses mathematics. Economists draw on the tools of calculus, linear algebra, statistics, game theory, and
computer science.[85] Professional economists are expected to be familiar with these tools, while a minority specialize in
econometrics and mathematical methods.

Theory
Mainstream economic theory relies upon a priori quantitative economic models, which employ a variety of concepts. Theory
typically proceeds with an assumption of ceteris paribus, which means holding constant explanatory variables other than the one
under consideration. When creating theories, the objective is to find ones which are at least as simple in information requirements,
more precise in predictions, and more fruitful in generating additional research than prior theories.[86] While neoclassical economic
theory constitutes both the dominant or orthodox theoretical as well as methodological framework, economic theory can also take the
form of other schools of thought such as in heterodox economic theories.

In microeconomics, principal concepts include supply and demand, marginalism, rational choice theory, opportunity cost, budget
constraints, utility, and the theory of the firm.[87] Early macroeconomic models focused on modelling the relationships between
aggregate variables, but as the relationships appeared to change over time macroeconomists, including new Keynesians, reformulated
their models in microfoundations.[71]

The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in monetary theory, the
quantity theory of moneypredicts that increases in the growth rate of the money supply increase inflation, and inflation is assumed to
be influenced by rational expectations. In development economics, slower growth in developed nations has been sometimes predicted
because of the declining marginal returns of investment and capital, and this has been observed in the Four Asian Tigers. Sometimes
an economic hypothesis is onlyqualitative, not quantitative.[88]

Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of
generality, Paul Samuelson's treatise Foundations of Economic Analysis (1947) used mathematical methods beyond graphs to
represent the theory, particularly as to maximizing behavioural relations of agents reaching equilibrium. The book focused on
examining the class of statements called operationally meaningful theorems in economics, which are theorems that can conceivably
be refuted by empirical data.[89]
Empirical investigation
Economic theories are frequently tested empirically, largely through the use of econometrics using economic data.[90] The controlled
experiments common to thephysical sciences are difficult and uncommon in economics,[91] and instead broad data is observationally
studied; this type of testing is typically regarded as less rigorous than controlled experimentation, and the conclusions typically more
tentative. However, the field of experimental economicsis growing, and increasing use is being made ofnatural experiments.

Statistical methods such as regression analysis are common. Practitioners use such methods to estimate the size, economic
significance, and statistical significance ("signal strength") of the hypothesized relation(s) and to adjust for noise from other
variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is
dependent upon the falsifiable hypothesis surviving tests. Use of commonly accepted methods need not produce a final conclusion or
even a consensus on a particular question, given dif
ferent tests, data sets, and prior beliefs.

Criticisms based on professional standards and non-replicability of results serve as further checks against bias, errors, and over-
generalization,[92][93] although much economic research has been accused of being non-replicable, and prestigious journals have
been accused of not facilitating replication through the provision of the code and data.[94] Like theories, uses of test statistics are
themselves open to critical analysis,[95] although critical commentary on papers in economics in prestigious journals such as the
American Economic Review has declined precipitously in the past 40 years. This has been attributed to journals' incentives to
[96]
maximize citations in order to rank higher on the Social Science Citation Index (SSCI).

In applied economics,input-output models employing linear programming methods are quite common. Large amounts of data are run
through computer programs to analyse the impact of certain policies;IMPLAN is one well-known example.

Experimental economicshas promoted the use ofscientifically controlledexperiments. This has reduced the long-noted distinction of
economics from natural sciences because it allows direct tests of what were previously taken as axioms.[97] In some cases these have
found that the axioms are not entirely correct; for example, theultimatum game has revealed that people reject unequal offers.

In behavioural economics, psychologist Daniel Kahneman won the Nobel Prize in economics in 2002 for his and Amos Tversky's
empirical discovery of several cognitive biases and heuristics. Similar empirical testing occurs in neuroeconomics. Another example
is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences.[98]
These techniques have led some to argue that economics is a "genuine science".[99]

Profession
The professionalization of economics, reflected in the growth of graduate programmes on the subject, has been described as "the
main change in economics since around 1900".[100] Most major universities and many colleges have a major, school, or department
in which academic degrees are awarded in the subject, whether in theliberal arts, business, or for professional study.

In the private sector, professional economists are employed as consultants and in industry
, including banking and finance. Economists
also work for various government departments and agencies, for example, the national
Treasury, Central Bank or Bureau of Statistics.

The Nobel Memorial Prize in Economic Sciences (commonly known as the Nobel Prize in Economics) is a prize awarded to
economists each year for outstanding intellectual contributions in the field.

Related subjects
Economics is one social science among several and has fields bordering on other areas, including economic geography, economic
history, public choice, energy economics, cultural economics, family economics and institutional economics.

Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes
the use of economic concepts to explain the effects of legal rules, to assess which legal rules areeconomically efficient, and to predict
what the legal rules will be.[101] A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights
could overcome the problems ofexternalities.[102]
Political economy is the interdisciplinary study that combines economics, law, and political science in explaining how political
institutions, the political environment, and the economic system (capitalist, socialist, mixed) influence each other. It studies questions
such as how monopoly, rent-seeking behaviour, and externalities should impact government policy.[103] Historians have employed
political economy to explore the ways in the past that persons and groups with common economic interests have used politics to
effect changes beneficial to their interests.[104]

Energy economics is a broad scientific subject area which includes topics related to energy supply and energy demand. Georgescu-
Roegen reintroduced the concept of entropy in relation to economics and energy from thermodynamics, as distinguished from what
he viewed as the mechanistic foundation of neoclassical economics drawn from Newtonian physics. His work contributed
significantly to thermoeconomics and to ecological economics. He also did foundational work which later developed into
evolutionary economics.[105]

The sociological subfield of economic sociology arose, primarily through the work of Émile Durkheim, Max Weber and Georg
Simmel, as an approach to analysing the effects of economic phenomena in relation to the overarching social paradigm (i.e.
modernity).[106] Classic works include Max Weber's The Protestant Ethic and the Spirit of Capitalism (1905) and Georg Simmel's
The Philosophy of Money (1900). More recently, the works of Mark Granovetter, Peter Hedstrom and Richard Swedberg have been
influential in this field.

History
Economic writings date from earlier Mesopotamian, Greek, Roman, Indian subcontinent, Chinese, Persian, and Arab civilizations.
Economic precepts occur throughout the writings of theBoeotian poet Hesiod and several economic historians have described Hesiod
himself as the "first economist".[107] Other notable writers from Antiquity through to the Renaissance include Aristotle, Xenophon,
Chanakya (also known as Kautilya), Qin Shi Huang, Thomas Aquinas, and Ibn Khaldun. Joseph Schumpeter described Aquinas as
"coming nearer than any other group to being the "founders' of scientific economics" as to monetary, interest, and value theory within
a natural-law perspective.[108]

Two groups, later called "mercantilists" and "physiocrats", more directly

A seaport with a ship arriving
influenced the subsequent development of the subject. Both groups were
associated with the rise of economic nationalism and modern capitalism in
Europe. Mercantilism was an economic doctrine that flourished from the 16th
to 18th century in a prolific pamphlet literature, whether of merchants or
statesmen. It held that a nation's wealth depended on its accumulation of gold
and silver. Nations without access to mines could obtain gold and silver from
trade only by selling goods abroad and restricting imports other than of gold
and silver. The doctrine called for importing cheap raw materials to be used in
manufacturing goods, which could be exported, and for state regulation to
A 1638 painting of a French seaport
impose protective tariffs on foreign manufactured goods and prohibit
during the heyday of mercantilism.
manufacturing in the colonies.[109]

Physiocrats, a group of 18th-century French thinkers and writers, developed

the idea of the economy as a circular flow of income and output. Physiocrats believed that only agricultural production generated a
clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting
manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively
costly tax collections with a single tax on income of land owners. In reaction against copious mercantilist trade regulations, the
.[110]
physiocrats advocated a policy oflaissez-faire, which called for minimal government intervention in the economy

Adam Smith (1723–1790) was an early economic theorist.[111] Smith was harshly critical of the mercantilists but described the
physiocratic system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the
subject.[112]
Classical political economy
The publication of Adam Smith's The Wealth of Nations in 1776, has been described as "the
A man facing the right
effective birth of economics as a separate discipline."[113] The book identified land, labour,
and capital as the three factors of production and the major contributors to a nation's wealth,
as distinct from the physiocratic idea that only agriculture was productive.

Smith discusses potential benefits of specialization by division of labour, including increased

labour productivity and gains from trade, whether between town and country or across
countries.[114] His "theorem" that "the division of labor is limited by the extent of the market"
has been described as the "core of a theory of the functions of firm and industry" and a
"fundamental principle of economic organization."[115] To Smith has also been ascribed "the
most important substantive proposition in all of economics" and foundation of resource-
allocation theory – that, under competition, resource owners (of labour, land, and capital) seek
their most profitable uses, resulting in an equal rate of return for all uses in equilibrium
(adjusted for apparent differences arising from such factors as training and The publication of Adam
unemployment).[116] Smith's The Wealth of
Nations in 1776 is
In an argument that includes "one of the most famous passages in all economics,"[117] Smith considered to be the first
formalisation of economic
represents every individual as trying to employ any capital they might command for their own
thought.
advantage, not that of the society,[c] and for the sake of profit, which is necessary at some
level for employing capital in domestic industry, and positively related to the value of
produce.[119] In this:

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By
preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that
industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this,
as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always
the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the
society more effectually than when he really intends to promote it.[120]

The Rev. Thomas Robert Malthus(1798) used the concept of diminishing returns to explain low living standards. Human population,
he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a
rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was
[121]
chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.
Economist Julian Lincoln Simon has criticized Malthus's conclusions.[122]

While Adam Smith emphasized the production of income, David Ricardo (1817) focused on the distribution of income among
landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on
the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds
down wages and profits. Ricardo was the first to state and prove the principle of comparative advantage, according to which each
country should specialize in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its
own production.[123] It has been termed a "fundamental analytical explanation" forgains from trade.[124]

Coming at the end of the classical tradition, John Stuart Mill (1848) parted company with the earlier classical economists on the
inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's
two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in
[125]
distributing income, he wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring
it". Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[126] Other classical
economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of any
market economy to settle in a final stationary state made up of a constant stock of physical wealth (capital) and a constant population
size.

Marxism
Marxist (later, Marxian) economics descends from classical economics. It derives from the
A man facing the viewer
work of Karl Marx. The first volume of Marx's major work, Das Kapital, was published in
German in 1867. In it, Marx focused on the labour theory of value and the theory of surplus
value which, he believed, explained the exploitation of labour by capital.[127] The labour
theory of value held that the value of an exchanged commodity was determined by the labour
that went into its production and the theory of surplus value demonstrated how the workers
[83]
only got paid a proportion of the value their work had created.

Neoclassical economics
At the dawn as a social science, economics was defined and discussed at length as the study
of production, distribution, and consumption of wealth by Jean-Baptiste Say in his Treatise on The Marxist school of
economic thought comes
Political Economy or, The Production, Distribution, and Consumption of Wealth (1803).
from the work of German
These three items are considered by the science only in relation to the increase or diminution
economist Karl Marx.
[d] Say's definition has prevailed
of wealth, and not in reference to their processes of execution.
up to our time, saved by substituting the word "wealth" for "goods and services" meaning that
wealth may include non-material objects as well. One hundred and thirty years later, Lionel Robbins noticed that this definition no
longer sufficed,[e] because many economists were making theoretical and philosophical inroads in other areas of human activity. In
his Essay on the Nature and Significance of Economic Science, he proposed a definition of economics as a study of a particular aspect
of human behaviour, the one that falls under the influence of scarcity,[f] which forces people to choose, allocate scarce resources to
competing ends, and economize (seeking the greatest welfare while avoiding the wasting of scarce resources). For Robbins, the
insufficiency was solved, and his definition allows us to proclaim, with an easy conscience, education economics, safety and security
economics, health economics, war economics, and of course, production, distribution and consumption economics as valid subjects
of the economic science."

Citing Robbins: "Economics is the science which studies human behavior as a relationship between ends and scarce means which
have alternative uses".[24] After discussing it for decades, Robbins' definition became widely accepted by mainstream economists,
and it has opened way into current textbooks.[128] Although far from unanimous, most mainstream economists would accept some
version of Robbins' definition, even though many have raised serious objections to the scope and method of economics, emanating
from that definition.[129] Due to the lack of strong consensus, and that production, distribution and consumption of goods and
services is the prime area of study of economics, the old definition still stands in many quarters.

A body of theory later termed "neoclassical economics" or "marginalism" formed from about 1870 to 1910. The term "economics"
was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for "economic science" and a substitute
for the earlier "political economy".[13][14] This corresponded to the influence on the subject of mathematical methods used in the
natural sciences.[130]

Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting
both the allocation of output and the distribution of income. It dispensed with the labour theory of value inherited from classical
economics in favour of a marginal utility theory of value on the demand side and a more general theory of costs on the supply
side.[131] In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could
be measured in favour ofordinal utility, which hypothesizes merely behaviour-based relations across persons.[40][132]
In microeconomics, neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making.
An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect
quantity demanded.[40] In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian
macroeconomics.[68][133]

Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers. Modern mainstream
economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as
econometrics, game theory, analysis of market failure and imperfect competition, and the neoclassical model of economic growth for
analysing long-run variables affecting national income.

Neoclassical economics studies the behaviour of individuals, households, and organizations (called economic actors, players, or
agents), when they manage or use scarce resources, which have alternative uses, to achieve desired ends. Agents are assumed to act
rationally, have multiple desirable ends in sight, limited resources to obtain these ends, a set of stable preferences, a definite overall
guiding objective, and the capability of making a choice. There exists an economic problem, subject to study by economic science,
when a decision (choice) is made by one or more resource-controlling players to attain the best possible outcome under bounded
rational conditions. In other words, resource-controlling agents maximize value subject to the constraints imposed by the information
the agents have, their cognitive limitations, and the finite amount of time they have to make and execute a decision. Economic
.[134] They are the focus of economic analysis.[g]
science centres on the activities of the economic agents that comprise society

An approach to understanding these processes, through the study of agent behaviour under scarcity
, may go as follows:

The continuous interplay (exchange or trade) done by economic actors in all markets sets the prices for all goods and services which,
in turn, make the rational managing of scarce resources possible. At the same time, the decisions (choices) made by the same actors,
while they are pursuing their own interest, determine the level of output (production), consumption, savings, and investment, in an
economy, as well as the remuneration (distribution) paid to the owners of labour (in the form of wages), capital (in the form of
profits) and land (in the form of rent).[h] Each period, as if they were in a giant feedback system, economic players influence the
pricing processes and the economy, and are in turn influenced by them until a steady state (equilibrium) of all variables involved is
reached or until an external shock throws the system toward a new equilibrium point. Because of the autonomous actions of rational
[i]
interacting agents, the economy is a complex adaptive system.

Keynesian economics
Keynesian economics derives from John Maynard Keynes, in particular his book The General
Theory of Employment, Interest and Money (1936), which ushered in contemporary
macroeconomics as a distinct field.[135] The book focused on determinants of national income
in the short run when prices are relatively inflexible. Keynes attempted to explain in broad
theoretical detail why high labour-market unemployment might not be self-correcting due to
low "effective demand" and why even price flexibility and monetary policy might be
unavailing. The term "revolutionary" has been applied to the book in its impact on economic
analysis.[136]

Keynesian economics has two successors. Post-Keynesian economics also concentrates on

macroeconomic rigidities and adjustment processes. Research on micro foundations for their
models is represented as based on real-life practices rather than simple optimizing models. It John Maynard Keynes
is generally associated with theUniversity of Cambridgeand the work of Joan Robinson.[137] (right), was a key theorist in
economics.
New-Keynesian economics is also associated with developments in the Keynesian fashion.
Within this group researchers tend to share with other economists the emphasis on models
employing micro foundations and optimizing behaviour but with a narrower focus on standard Keynesian themes such as price and
wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-
style ones.
Chicago school of economics
The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Milton Friedman
and monetarists, market economies are inherently stable if the money supply does not greatly expand or contract. Ben Bernanke,
former Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the
Great Depression.[138]

Milton Friedman effectively took many of the basic principles set forth by Adam Smith and the classical economists and modernized
them. One example of this is his article in the 13 September 1970 issue of The New York Times Magazine, in which he claims that the
social responsibility of business should be "to use its resources and engage in activities designed to increase its profits ... (through)
[139]
open and free competition without deception or fraud."

Other schools and approaches

Other well-known schools or trends of thought referring to a particular style of economics practised at and disseminated from well-
defined groups of academicians that have become known worldwide, include the Austrian School, the Freiburg School, the School of
Lausanne, post-Keynesian economics and the Stockholm school. Contemporary mainstream economics is sometimes separated into
the Saltwater approach of those universities along the Eastern and Western coasts of the US, and the Freshwater, or Chicago-school
approach.

Within macroeconomics there is, in general order of their appearance in the literature; classical economics, Keynesian economics, the
neoclassical synthesis, post-Keynesian economics, monetarism, new classical economics, and supply-side economics. Alternative
developments includeecological economics, constitutional economics, institutional economics, evolutionary economics, dependency
theory, structuralist economics, world systems theory, econophysics, feminist economics and biophysical economics.[140]

Agreements
According to various random and anonymous surveys of members of the American Economic Association, economists have
[141][142][143][144][145]
agreement about the following propositions by percentage:>

1. A ceiling on rents reduces the quantity and quality of housing available. (93% agree)
2. Tariffs and import quotas usually reduce general economic welfare. (93% agree)
3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90% agree)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impacton a less
than fully employed economy. (90% agree)
5. The United States should not restrict employers fromoutsourcing work to foreign countries. (90% agree)
6. Economic growth in developed countries like the United States leads to greater levels of well-being. (88% agree)
7. The United States should eliminateagricultural subsidies. (85% agree)
8. An appropriately designed fiscal policy can increase the long-run rate of capital formation. (85% agree)
9. Local and state governments should eliminate subsidies toprofessional sports franchises. (85% agree)
10. If the federal budget is to be balanced, it should be done over thebusiness cycle rather than yearly. (85% agree)
11. The gap between Social Security funds and expenditureswill become unsustainably large within the next fifty years
if current policies remain unchanged. (85% agree)
12. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value.
(84% agree)
13. A large federal budget deficit has an adverse effect on the economy. (83% agree)
14. The redistribution of incomein the United States is a legitimate role for the government. (83% agree)
15. Inflation is caused primarily by too much growth in themoney supply. (83% agree)
16. The United States should not bangenetically modified crops. (82% agree)
17. A minimum wage increases unemployment among young and unskilled workers. (79% agree)
18. The government should restructure the welfare system along the lines of anegative
" income tax." (79% agree)
19. Effluent taxes and marketable pollution permitsrepresent a better approach topollution control than imposition of
pollution ceilings. (78% agree)
20. Government subsidies on ethanol in the United States should be reduced or eliminated. (78% agree)
Criticisms

General criticisms
"The dismal science" is a derogatory alternative name for economics devised by the Victorian historian Thomas Carlyle in the 19th
century. It is often stated that Carlyle gave economics the nickname "the dismal science" as a response to the late 18th century
writings of The Reverend Thomas Robert Malthus, who grimly predicted that starvation would result, as projected population growth
exceeded the rate of increase in the food supply. However, the actual phrase was coined by Carlyle in the context of a debate with
John Stuart Mill on slavery, in which Carlyle argued for slavery, while Mill opposed it.[20]

Some economists, like John Stuart Mill or Léon Walras, have maintained that the production of wealth should not be tied to its
distribution.[146]

In The Wealth of Nations, Adam Smith addressed many issues that are currently also the subject of debate and dispute. Smith
repeatedly attacks groups of politically aligned individuals who attempt to use their collective influence to manipulate a government
into doing their bidding. In Smith's day, these were referred to as factions, but are now more commonly called special interests, a
term which can comprise international bankers, corporate conglomerations, outright oligopolies, monopolies, trade unions and other
groups.[j]

Economics per se, as a social science, is independent of the political acts of any government or other decision-making organization;
however, many policymakers or individuals holding highly ranked positions that can influence other people's lives are known for
arbitrarily using a plethora of economic concepts and rhetoric as vehicles to legitimize agendas and value systems, and do not limit
their remarks to matters relevant to their responsibilities.[147] The close relation of economic theory and practice with politics[148] is
a focus of contention that may shade or distort the most unpretentious original tenets of economics, and is often confused with
specific social agendas and value systems.[149]

Notwithstanding, economics legitimately has a role in informing government policy. It is, indeed, in some ways an outgrowth of the
older field of political economy. Some academic economic journals have increased their efforts to gauge the consensus of economists
regarding certain policy issues in hopes of effecting a more informed political environment. Often there exists a low approval rate
from professional economists regarding many public policies. Policy issues featured in one survey of American Economic
Association economists include trade restrictions, social insurance for those put out of work by international competition, genetically
modified foods, curbside recycling, health insurance (several questions), medical malpractice, barriers to entering the medical
profession, organ donations, unhealthy foods, mortgage deductions, taxing internet sales, Wal-Mart, casinos, ethanol subsidies, and
inflation targeting.[150]

In Steady State Economics 1977, leading ecological economist and steady-state theorist Herman Daly argues that there exist logical
[151]
inconsistencies between the emphasis placed on economic growth and the limited availability of natural resources.

Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of
macroeconomic policies[152] (monetary and fiscal policy) of the state, are focus of contention and criticism.[153]

Deirdre McCloskey has argued that many empirical economic studies are poorly reported, and she and Stephen Ziliak argue that
[154] This latter contention is controversial.[155]
although her critique has been well-received, practice has not improved.

A 2002 International Monetary Fund study assessed the national economic growth predictions from Consensus Forecasts in the
[156]
1990s. Of the 60 different national recessions thatoccurred, only 2 (3%) were predicted a year in advance.

Criticisms of assumptions
Economics has been subject to criticism that it relies on unrealistic, unverifiable, or highly simplified assumptions, in some cases
because these assumptions simplify the proofs of desired conclusions. Examples of such assumptions include perfect information,
profit maximization and rational choices.[157] The field of information economics includes both mathematical-economical research
and also behavioural economics, akin to studies in behavioural psychology.[158]

Nevertheless, prominent mainstream economists such as Keynes[159] and Joskow have observed that much of economics is
conceptual rather than quantitative, and difficult to model and formalize quantitatively. In a discussion on oligopoly research, Paul
Joskow pointed out in 1975 that in practice, serious students of actual economies tended to use "informal models" based upon
qualitative factors specific to particular industries. Joskow had a strong feeling that the important work in oligopoly was done through
informal observations while formal models were "trotted outex post". He argued that formal models were largely not important in the
, was neglected.[160]
empirical work, either, and that the fundamental factor behind the theory of the firm, behaviour

In recent years, feminist critiques of neoclassical economic models gained prominence, leading to the formation of feminist
economics.[161] Contrary to common conceptions of economics as apositive and objective science, feminist economists call attention
to the social construction of economics[162] and highlight the ways in which its models and methods reflect masculine preferences.
Primary criticisms focus on failures to account for: the selfish nature of actors (homo economicus); exogenous tastes; the
impossibility of utility comparisons; the exclusion of unpaid work; and the exclusion of class and gender considerations. Feminist
economics developed to address these concerns, and the field now includes critical examinations of many areas of economics
including paid and unpaid work, economic epistemology and history, globalization, household economics and the care economy. In
1988, Marilyn Waring published the book If Women Counted, in which she argues that the discipline of economics ignores women's
unpaid work and the value of nature;[163] according to Julie A. Nelson, If Women Counted "showed exactly how the unpaid work
traditionally done by women has been made invisible within national accounting systems" and "issued a wake-up call to issues of
ecological sustainability."[164] Bjørnholt and McKay argue that the financial crisis of 2007–08and the response to it revealed a crisis
of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic
theory and the economics profession. They argue that such a reshaping should include new advances within feminist economics that
take as their starting point the socially responsible, sensible and accountable subject in creating an economy and economic theories
[165]
that fully acknowledge care for each other as well as the planet.

Philip Mirowski observes that:

The imperatives of the orthodox research programme [of economic science] leave little room for maneuver and less
room for originality. ... These mandates ... Appropriate as many mathematical techniques and metaphorical
expressions from contemporary respectable science, primarily physics as possible. ... Preserve to the maximum extent
possible the attendant nineteenth-century overtones of "natural order" ... Deny strenuously that neoclassical theory
slavishly imitates physics. ... Above all, prevent all rival research programmes from encroaching ... by ridiculing all
external attempts to appropriate twentieth century physics models. ... All theorizing is [in this way] held hostage to
nineteenth-century concepts of energy.[166]

In a series of peer-reviewed journal and conference papers and books published over a period of several decades, John McMurtry has
provided extensive criticism of what he terms the "unexamined assumptions and implications [of economics], and their consequent
cost to people's lives."[167][k]

Nassim Nicholas Taleb and Michael Perelman are two additional scholars who criticized conventional or mainstream economics.
Taleb opposes most economic theorizing, which in his view suffers acutely from the problem of overuse of Plato's Theory of Forms,
and calls for cancellation of the Nobel Memorial Prize in Economics, saying that the damage from economic theories can be
devastating.[168] Michael Perelman provides extensive criticism of economics and its assumptions in all his books (and especially his
books published from 2000 to date), papers and interviews.

[169]
Despite these concerns, mainstream graduate programs have become increasingly technical and mathematical.

See also
Business ethics

Economics terminology that differs from common usage

 Economic ideology
Economic policy
Economic union
Free trade
List of economic communities
List of economics films
List of free trade agreements
Socioeconomics
Gross National Happiness
Liquidationism (economics)
General:

Glossary of economics
Index of economics articles
Outline of economics

Notes
a. The term economics is derived from economic science, and the word economic is perhaps shortened from
economical or derived from the French wordéconomique or directly from the Latin wordoeconomicus "of domestic
economy". This in turn comes from theAncient Greek οἰκονομικός (oikonomikos), "practiced in the management of a
household or family" and therefore "frugal, thrifty", which in turn comes from
οἰκονομία (oikonomia) "household
management" which in turn comes fromοἶκος (oikos "house") and νόμος (nomos, "custom" or "law").[11]
b. Compare with Nicholas Barr (2004), whose list of market failures is melded with failures of economic assumptions,
which are (1) producers as price takers (i.e. presence of oligopoly or monopoly; but why is this not a product of the
following?) (2) equal power of consumers (what labour lawyers call an imbalance of bargaining power) (3) complete
markets (4) public goods (5) external effects (i.e. externalities?) (6) increasing returns to scale (i.e. practical
monopoly) (7) perfect information (inThe Economics of the Welfare State ([Link]
QgAACAAJ&pg=PP1) (4th ed.). Oxford University Press. 2004. pp. 72–[Link] 978-0-19-926497-1.).
• Joseph E. Stiglitz (2015) classifies market failures as from failure of competition (includingnatural monopoly),
information asymmetries, incomplete markets, externalities, public good situations, and macroeconomic
disturbances (in "Chapter 4: Market Failure".Economics of the Public Sector: Fourth International Student Edition(ht
tps://[Link]/books?id=miPeCgAAQBAJ&pg=PP1)(4th ed.). W. W. Norton & Company. 2015. pp. 81–
100. ISBN 978-0-393-93709-1.).
c. "Capital" in Smith's usage includesfixed capital and circulating capital. The latter includes wages and labour
maintenance, money, and inputs from land, mines, and fisheries associated with production. [118]

d. "This science indicates the cases in which commerce is truly productive, where whatever is gained by one is lost by
another, and where it is profitable to all; it also teaches us to appreciate its several processes, but simply in their
results, at which it stops. Besides this knowledge, the merchant must also understand the processes of his art. He
must be acquainted with the commodities in which he deals, their qualities and defects, the countries from which
they are derived, their markets, the means of their transportation, the values to be given for them in exchange, and
the method of keeping accounts. The same remark is applicable to the agriculturist, to the manufacturer , and to the
practical man of business; to acquire a thorough knowledge of the causes and consequences of each phenomenon,
the study of political economy is essentially necessary to them all; and to become expert in his particular pursuit,
each one must add thereto a knowledge of its processes."Say ( 1803, p. XVI)
e. "And when we submit the definition in question to this test, it is seen to possess deficiencies which, so far from being
marginal and subsidiary, amount to nothing less than a complete failure to exhibit either the scope or the significance
of the most central generalisations of all."(Robbins 2007, p. 5)
f. "The conception we have adopted may be described as analytical. It does not attempt to pick out certain kinds of
behaviour, but focuses attention on a particular aspect of behaviour, the form imposed by the influence of scarcity
.
(Robbins 2007, p. 17)
g. See Agent-based computational economics
h. Interest payments are considered a form of rent on credit money
.
i. See Complex adaptive systemand Dynamic network analysis
 j. See Chomsky, Noam (14 October 2008). "Ruling the World" ([Link]
[Link]/[Link]). Understanding Power. Archived from the original ([Link]
[Link]/[Link]) on 14 October 2008. on Smith's emphasis on class conflict in the Wealth of Nations.
k. Please see partial list of publications, including peer-reviewed papers and books, on
John McMurtry's wikipedia
page, as well as links to the text of several of his peer-reviewed papers and peer-reviewed secondary references
analyzing and discussing his work.

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Further reading
Grinin, L., Korotayev, A. and Tausch A. (2016) Economic Cycles, Crises, and the Global Periphery. Springer
International Publishing, Heidelberg, New York, Dordrecht, London,ISBN 978-3-319-17780-9;
[Link]
McCann, Charles Robert, Jr., 2003. The Elgar Dictionary of Economic Quotations, Edward Elgar. Preview.
Jean Baptiste Say (1821).A Treatise on Political Economy: Or The Production, Distribution, and Consumption of
Wealth. one. Wells and Lilly.
Jean Baptiste Say (1821).A Treatise on Political Economy; Or The Production, Distribution, and Consumption of
Wealth. two. Wells and Lilly.
Tausch, Arno (2015). The political algebra of global value change. General models and implications for the Muslim
world. With Almas Heshmati and Hichem Karoui(1st ed.). Nova Science Publishers, New Y ork. ISBN 978-1-62948-
899-8.

External links
General information

Economics at Curlie
Economic journals on the web
Economics at Encyclopædia Britannica
Intute: Economics: Internet directory of UK universities
Research Papers in Economics (RePEc)
Resources For Economists: American Economic Association-sponsored guide to 2,000+ Internet resources from
"Data" to "Neat Stuff", updated quarterly.

Institutions and organizations

Economics Departments, Institutes and Research Centers in the W

orld
Organization For Co-operation and Economic Development (OECD) Statistics
United Nations Statistics Division
World Bank Data

Study resources

McConnell, Campbell R.;et al. (2009). Economics. Principles, Problems and Policies(PDF) (18th ed.). New York:
McGraw-Hill. ISBN 9780073375694. Archived from the original (PDF contains full textbook)on 6 October 2016.
Economics at [Link]
Economics textbooks on Wikibooks
MERLOT Learning Materials: Economics: US-based database of learning materials
 Online Learning and Teaching Materials UK Economics Network's database of text, slides, glossaries and other
resources

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