What is Economics?
- Human-beings maintain their lives through the satisfaction of their material needs and wants. In addition to such principal services as health, education, security and transportation, the most fundamental material human needs are food, clothing and shelter. Humans have also material wants, like owning a car, home appliances, personal computers; going to the movies and theaters; buying books and newspapers; taking a vacation, etc. Goods and services are produced in order to meet such material human needs and wants. Humans are social beings that maintain their material lives by consuming the goods and services produced. The production, distribution and consumption of goods and services constitute the economy component of social life.
- Market is an economic institution that brings together the producers who seek to make profits, and the consumers who strive for satisfying their needs and wants. Flow of goods and services from the producers to the consumers is maintained by the market.
- On the other hand, the state (government) is a political institution that can influence the functioning of the economy and stimulate social development by collecting taxes, providing public services, regulating and supervising the market processes, designing and implementing policies to foster economic development, and taking precautionary measures to reduce poverty and socio-economic inequalities.
- Economics is both a social and technical science, which examines the operation of the economy, market processes, the economic role of the state, and government interventions to the market. In order be able to understand all these phenomena; both institutional and historical frameworks of analysis and theoretical and applied models are utilized in economics. Therefore, "economics literacy" requires the acquisition of a scientific foundation that comprises institutional and historical analyses as well as theoretical and applied constructs.
- Historical analyses and comparisons are employed in economics in order to examine the complex institutional interactions among the economy, the state and society within a long-term and comprehensive perspective. On the other hand, mathematical models that involve simplifying assumptions are constructed in theoretical economics in order to facilitate the comprehension of the complexity of the real world; and statistical methods are employed in applied economics in order to test the validity of these models by using real data-sets.
- Economic analyses that involve historical and institutional perspectives can be generally categorized under the field of political economy. Political economy deals with the operation of the economy and the evolution of political and social institutions in comprehensive and historical integrity. The geography-, country- and time-specific differences in terms of economic dynamics and political and social structures are taken into account by many of the political-economy approaches. Political economy can be broadly defined as the social-scientific field and historical perspective, in which the economy is studied without making extensive abstractions from political and social institutions. Therefore, political economy establishes more explicit inter-disciplinary connections with major social sciences, such as political science and sociology, and makes use of history-based research methods more intensively. Some sub-fields of political economy can be listed as follows: Economic history, history of economic thought, Marxist political economy, dependency theory, neo-Marxist theories, world-system analysis, development economics, structuralist economics, post-Keynesian economics, international development studies, international political economy, evolutionary political economy, institutional political economy, cultural economics…
- There is a pedagogical view that a pluralist and functional economics curriculum should teach economic theory by accommodating historical/institutional perspectives and political-economy approaches more intensively. This view has been expressed much more widely in recent years.
- Economic theory, which makes extensive use of mathematical models and statistical methods, has two principal divisions:
1) Microeconomic theory, which examines the economic choices of producer and consumer units (firms and households) at individual or sectoral level, along with the market effects of government policies on these choices, and
2)Macroeconomic theory, which studies the economy and the markets at country level, examines government policies in the context of the general functioning of the economy, and deals with the effects of the world economy on national economies.
- The producer theory section of microeconomics investigates the conditions of the least costly and the most productive use of limited factors of production (labor, capital and land) and inputs (such as raw materials, intermediate goods, electricity, fuel and water). The effects of different market structures (such as "perfect competition", "monopolistic competition" and "monopoly") on the production-related decisions and profitability of the producers are also examined in the context producer theory. The consumer theory section of microeconomics studies the conditions of satisfying needs and wants by obtaining the highest utility from consumption under the income constraint. In microeconomics, which elaborates the conditions and ways of choosing "the best" options among possible alternatives, economic choices of producers and consumers constitute the supply and demand components of the market, respectively. The market price is determined together by the supply and demand. Changes in supply or demand result in changes in the market price. Effects of government interventions to the market (such as purchase/sales taxes, import tariffs, import quotas, price floors and ceilings, subsidies to producers or consumers) are also explored under microeconomics. Some sub-fields of microeconomics are: theory of international trade, industrial economics, economics of technology and innovation, evolutionary economics, labor economics, theory of consumer behavior, agricultural economics, public economics, welfare economics, game theory, theory of market design, economics of regulation, experimental economics, behavioral economics…
- As the other principal division of theoretical economics, macroeconomic theory examines the markets for goods and services, labor, money, foreign exchange and capital at national and international levels. National income accounting, economic growth, inflation, unemployment, monetary and fiscal policies, determination of the interest rates and the foreign exchange rates, exchange rate systems, current account balance, capital movements, balance of payments, business cycles, economic recessions, financial crises, and the dynamics of the world economy are the main research areas of macroeconomics. Some major macroeconomic indicators are: Gross Domestic Product (GDP), which is the value of all final goods and services produced in a country in a given period of time; growth rate that measures the changes in GDP; private consumption, private investment, public expenditures, exports and imports that constitute the fundamental components of GDP; inflation rate that measures the changes in the general price level; unemployment rate that refers to the people in labor force who search for a job but can't find one; interest rates that influence consumption, saving and investment at the level of national economy; exchange rates that affect internal goods, services and money markets, as well as the external balance of payments; current account deficit that arises from the insufficiency of domestic saving with respect to domestic investment; external debt; portfolio investment; foreign direct investment; central bank reserves; international investment position... Some sub-fields of macroeconomics can be listed as follows: Economic growth, employment and unemployment studies, theories of business cycles, computable general equilibrium models, dynamic stochastic general equilibrium models, international financial economics, monetary economics, theories of inflation, theories of the exchange rate, theories of the interest rate, theories of financial crises, central banking studies, economics of fiscal policy…
- Both microeconomic and macroeconomic theories are constructed by means of mathematical models. Whether economic data actually support the hypotheses in these theories are tested by means of statistical methods, which involve data-sets that belong to firms, households, sectors, industries, markets and national economies in the real world. This field of testing is called econometrics, which requires the collective use of economics, mathematics and statistics together. Econometrics is one of the fundamental components of economics curricula in the leading universities of the world.
- Mathematics and statistics have a special importance in contemporary economics education. Therefore, high-quality education in economics necessitates efficient learning of mathematical models and statistical methods. And, such an economics education can be taken only in technically strong economics departments and programs.