AuthorJames Koch, Gerhard Plenert

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The study of economics leads to the formulation of the principles upon which the economy is based. History, politics, and the social sciences cannot be understood without the basic understanding of economic principles. The science of economics is concerned with the scientific laws that relate to business administration, and attempts to formulate the principles that relate to the satisfaction of wants.

The term "economics" covers such a broad range of meaning that any brief definition is likely to leave out some important aspect of the subject. It is a social science concerned with the study of economies and the relationships between them. Economics is the study of how people and society choose to employ scarce productive resources, which could have alternative uses, to produce various commodities and distribute them for consumption. Economics generally studies problems from society's point of view rather than from the individual's. Finally, economics studies the allocation of scarce resources among competing ends.


As a science, economics must first develop an understanding of the processes by which human desires are fulfilled. Second, economics must show how causes that affect production and consumption lead to various results. Furthermore, it must draw conclusions that will serve to guide those who conduct and, in part, control economic activity.


While there are numerous specialties within the academic field, at its most basic level economics is commonly divided into two broad areas of focus: microeconomics and macroeconomics. Microeconomics is the study of smaller levels of the economy, such as how an individual firm or a small group of firms operate. Macroeconomics is the study of whole economies or large sectors of economies.


Microeconomics is the social science dealing in the satisfaction of human wants using limited resources. It focuses on individual units that make up the whole of the economy. It examines how households and businesses behave as individual units, not as parts of a larger whole. For instance, microeconomics studies how a household spends its money. It also studies the way in which a business determines how much of a product to produce, how to make the best use of production factors, and what pricing strategy to use. Microeconomics also studies how

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individual markets and industries are organized, what patterns of competition they follow, and how these patterns affect economic efficiency and welfare.


Macroeconomics studies an economy at the aggregate level. It is concerned with the workings of the whole economy or large sectors of it. These sectors include government, business, and households. Macroeconomics deals with such issues as national economic output and growth, unemployment, recession, inflation, foreign trade, and monetary and fiscal policy.


Basic economic principles include the law of demand, demand determinants, the law of supply, supply determinants, market equilibrium, factors of production, the firm, gross product, as well as inflation and unemployment.


When an individual want is expressed as an intention to buy, it becomes a demand. The law of demand is a theory about the relationship between the amount of a good that a buyer both desires and is able to purchase per unit of time, and the price charged for it. The ability to pay is as important as the desire for the good, because economics is interested in explaining and predicting actual behavior in the marketplace, not just intentions. At a given price for a good, economics is interested in the buyer's demand that can effectively be backed by a purchase. Thus, it is implied with demand that a consumer not only has the desire and need for a product, but also has the money to purchase it. The law of demand states that the lower the price charged for a product, resource, or service, the larger will be the quantity demanded per unit of time. Conversely, the higher the price charged, the smaller will be the quantity demanded per unit of time—all other things being constant. For example, the lower the purchase price for a six-pack of Coca-Cola, the more a consumer will demand (up to some saturation point, of course).


Movement along the demand curve—referred to as a change in quantity demanded—means that only the price of the good and the quantity...

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