Importance of Economics in Our Life

Financial crisis gives rise to economic theory.

Economics is the study of how finite resources are consumed by demand, according to the costs imposed by their supply in relation to that demand. In other words, economics tells us that a freeze in Florida that damages the orange crop will cause the price of orange juice to change and how the price will modify demand over time.

History

Modern economic theory is said to have originated in "The Wealth of Nations," a book written by Scottish scholar Adam Smith in 1776. The theory holds that rational self interest pursued by individuals and businesses in a free market society leads to optimal economic conditions.

Types

The two main categories of economics are microeconomics and macroeconomics. Microeconomics is the study of how daily interplay of supply and demand influences and is influenced by the actions of consumers, manufacturers, corporations, and government. Macroeconomics is the study of economic conditions such as recession, bubbles, inflation, deflation and other results of microeconomic activities.

Significance

The study of economics helps formulate an understanding of the effects of financial actions and reactions by individuals and institutions. This understanding allows the projection of future economic conditions based on current indications.

Misconceptions

An understanding of economics assists governments in managing macroeconomic conditions such as limiting a recession by inducing recovery. However, economic theory is not foolproof because it is a social science based on the interplay between culture and money. Economic effects change as cultural customs change.

Supply Side Economics

Supply side economics, known as trickle down economics, attempt to create a more efficient economy through free and open markets, limited regulation, lower taxes and less government influence in social policy.

Keynesian Economics

Keynesian, or demand side economics, refute Adam Smith's theories, holding that government must regulate markets and commerce because if self interest is not regulated then it will destroy demand by pricing for profits rather than volume of transactions.

References

• EconomicsHelp.org: The Importance of Economics in our Daily Lives
• InvestorWords.com: Economics
• The New School: History of Economic Thought