The Nature of Economics

Defining Economics:

Economics in its complete definition, encompasses its nature as a social science that studies how households, firms and the government allocate scarce resources in the economy so that goods and services can be produced, distributed and consumed, also creating further wealth to ultimately satisfy the unlimited wants of society.

The main agents (households, firms and the government) all have different behaviours and interactions with each other, this is because they all have different goals. The households look at their personal satisfaction while the firms pursue profit,  the government on the other hand, prioritises the welfare of the overall nation.

The Branches of Economics:

Economics has two branches:

1. Microeconomics.

Microeconomics focuses on the individual agents in the economy, such as firms, consumers and state-owned (state being the government) and their behaviour as they allocate resources to satisfy the unlimited wants of society.

2. Macroeconomics.

Macroeconomics, however, views the economy as an aggregate and deals with major issues in the economy like unemployment, inflation and economic growth, to name a few.

N.B. One should remember that “Micro” involves segregated or smaller parts of the economy being the target while in “Macro,” the entire economy is targeted.

Defining an economy:

This is a mechanism that facilitates the organisation of resources so that goods and services can be produced to satisfy the wants and needs of society.

There are natural resources that come from the land ,like timber, oil and water, these are referred to as ‘god given gifts’ as man cannot reproduce them. There are also man-made resources, which use land and labour (factors of production) as inputs to produce goods and services.

For example, a firm may employ the resources of land and labour to produce agricultural products. The firm might employ labour to plant tomatoes for sale, they may continue further and decide to process these tomatoes into ketchup, for which they would also need labour to produce. They would then distribute the ketchup by selling it to those who demand it. When a person demands ketchup, this means that they have the capacity and willingness to buy it. The person then consumes it, by using the ketchup.

Simply put, the economy comprises the inter-linked activities of production (where goods and services are made) , distribution (the movement of these goods and services) and consumption (the use of goods and services).

An important mention is that the factors of production (F.o.p) are four, with each having their own reward. They are:

1. Land-Rent.
2. Labour-Wage.
3. Capital-Interest.
4. Enterprise-Profit.