Definition & Importance of Economics

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Economics studies how societies allocate limited resources to achieve their needs.
Economics studies how societies allocate limited resources to achieve their needs. (Image: Economic crisis image by Denis Ivatin from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Contrary to popular belief, economics is about much more than money, inflation, and supply and demand. At its core, economics studies how people make decisions. Households, companies and whole societies face a series of decisions--what to have for dinner, whether to invest in new equipment, how to fund a military. Economics provides valuable insights into how societies make decisions about their needs and wants and allocate the resources to achieve them.

Identification

Economics is the study of how societies manage scarce resources. Scarcity is a central concept in economics because resources--time, money, land and capital, among others--exist only in finite amounts. Societal needs and wants may be infinite, but resources are not. This means individuals, companies and whole societies must identify their most important needs and wants, allocating and economizing scarce resources in such a way that satisfies as many needs as possible.

Significance

The word "economics" comes from the Greek word for household management, according to Harvard economist Gregory Mankiw, a former White House economics adviser and author of the textbook “Principles of Economics.” Households, like entire economies, must make decisions and allocate resources. Economist David Levine, author of “Wealth and Freedom: An Introduction to Political Economy,” wrote that the concept of an economy was originally embedded in the household.

History

Economics as a field of study developed in the 17th and 18th centuries. Recognizing that economic life extends far beyond the household, involving other families, cities and nations, the discipline was known as political economy. Classical economists such as David Ricardo and John Stuart Mill titled their works “Principles of Political Economy.” The word economics displaced political economy during the late 19th century.

Function

Most colleges and universities require students to complete at least one course in economics. Mankiw writes that studying economics enables you to be a more knowledgeable participant in the modern economy, helping you be a smarter consumer, producer and investor. Knowledge of economics also deepens your understanding of world events and of government policies, helping you understand the limits of government actions.

Potential

Obtaining a degree in economics prepares a student for a wide range of career options, ranging from business to government. California State University at San Marcos cited a survey by Business Week magazine in which corporate leaders identified economics as second only to engineering as the best undergraduate degree.

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