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What is Economics? - Definition & Types

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  • 0:06 Allocation of Resources
  • 1:22 Microeconomics
  • 2:52 Macroeconomics
  • 4:37 Growth vs. Sustainability
  • 6:01 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Few things affect the day-to-day lives of everyone more than the economy. In this lesson, you'll learn about economics, including some of its foundational topics and concepts. You'll also have a chance to take a quiz after the lesson.

Economics - Allocation of Resources

Meet Joe. He is a typical entrepreneur in the United States who is about to start a new downtown coffee shop. We'll be following Joe throughout this lesson to see how economics affects his life. Economics is about the allocation of resources available to fulfill people's needs and wants for goods and services.

In a perfect world, we would have unlimited resources and everyone would have all their needs and wants fulfilled. But, we don't live in a perfect world; resources are scarce or limited. Consequently, not all wants can be fulfilled, and decisions must be made about the allocation of resources. Economics is studying how everyone from an individual to an entire country makes these decisions.

Joe lives in a market economy where most resources are held in the hands of individuals who have the right to decide what to do with them. Like everyone else, Joe both consumes resources in the economy and provides resources to the economy. For example, he supplies labor to the economy, and he also buys resources, such as food, transportation and housing. Since he's starting a coffee shop, he will have to obtain resources, such as espresso machines, grinders, coffee beans, milk and cups. He'll also need electricity and water as well as labor from employees.

Microeconomics

Since Joe wants to start a business, he'll be particularly interested in microeconomics, which is the study of how consumers and businesses make economic decisions. One of the most important concepts of microeconomics is the law of supply and demand. This law states that if everything else stays the same, the price of a good or service will be high if the demand for it is high and the supply of it is low.

On the other hand, if the demand for it is low and the supply of it is high, the price will tend to be low. If the demand for java is higher than the supply, the price of a cup will go up. If the demand for it is lower than the supply, Joe will have to cut his prices to make sales.

Some economists believe that the economy is guided by an 'invisible hand ' - a term coined by English economist Adam Smith in his book The Wealth of Nations. Basically, the idea is that buyers and sellers will make decisions based upon what's best for them - in their self-interest. And, the sum of these interests creates the best result for an economy.

Let's look at the invisible hand at work. Joe will only buy a commercial-grade espresso machine at a price that is worth it to him. Vinny, the vendor, will only sell his espresso maker to Joe at a price that is worth it to Vinny. No one makes Joe buy what Vinny is selling. They each decide on their own if it is in their best interests to do the deal. The price at which Joe is willing to buy and the price that Vinny is willing to sell should be an efficient allocation of economic resources.

Macroeconomics

Joe will also be interested in macroeconomics. While microeconomics studies a piece of the economy, macroeconomics studies the entire economy. It looks at economic effects in the aggregate. A hint to the distinction between microeconomics and macroeconomics can be found in their prefixes. 'Micro' means 'small' and 'macro' means 'big.' Macroeconomics looks at the big picture.

Common areas of study include:

  • Inflation, which is an increase in the general price-level in an economy
  • Unemployment
  • Economic output, which is the aggregate output of goods and services in the economy
  • Business cycle, which is the ups and downs of an economy, including growth, recession, depression and recovery
  • Fiscal policy, which is the government's decision on taxing and spending and its effect on an economy
  • Monetary policy, which is a government's decision regarding money supply and interest rates and its effect on an economy
  • International trade
  • Study of economic systems. Economists study different economic systems, such as free market economies, command economies and mixed economies

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