Economics: Definition, Overview, Branches & Basic Problems

Understanding economics

It is important to note that economics is a social science whose object of study is economic social facts, that is, humans in relation to their economic activity and social organization. According to Godoy, economic phenomena are explained by the presence of human activity, since it is human actions that give economic meaning to the real world of things and objects that surround us. For example, land, trees, and the sea would lack economic meaning if it were not for human activity that turns them into useful and necessary resources for life.

Likewise, he affirms that for the study of economic phenomena, it is necessary to analyze the human activities that determine the economic process. Therefore, it is necessary to systematize the understanding of this process through definitions of a general nature that reflect the economic system within which the private enterprise operates and the activities of individuals and social groups develop.

Economic Activity

Economic activity refers to any human action that transforms useful and scarce resources in order to satisfy needs related to the purposes of life. Some examples are buying a house, making a suit, or working in a factory. In this context, it is important to distinguish between different types of goods.

Types of goods

• Free goods: These are those that abound in nature and do not require effort to obtain, such as air and sunlight.
• Economic goods: These are goods that are useful but scarce, such as a house, a car, or food.
• Consumer goods: These are used directly to satisfy human needs and can be classified into different categories according to their durability or necessity, such as instant, semi-durable, or durable consumer goods. They are also called primary or essential goods, such as food, clothing, and housing, and secondary or less essential goods, such as cars or televisions.
• Producer goods: These give rise to consumer goods and can be machinery, semi-finished products, or manufacturing equipment.
• Complementary and substitute goods: Complementary goods are used simultaneously to satisfy a need, such as coffee and sugar, while substitute goods can be replaced by each other to satisfy needs, such as gas stoves and electric stoves.
• Personal services: These are intangible goods that satisfy human needs, such as medical or dental services.
• Intangible goods: These are rights that refer to literary, artistic, scientific, technological, among other properties, and are fundamental to protect creativity and innovation in different fields.

Needs

Needs needs are desires or deficiencies experienced by human beings that seek to be satisfied through the acquisition of goods and services, such as food, clothing, and housing. Economic needs are those that are satisfied with scarce means, while cultural needs seek the spiritual elevation of human beings.

Human needs are unlimited in number since there will always be new deficiencies or desires that will want to be satisfied. However, these needs are limited in capacity, meaning that once a need is satisfied, its intensity decreases, and the human being seeks to satisfy other needs. This concept is known as the law of the satiety of human needs.

Utility

Utility is the ability that a good has to satisfy human needs. For example, a plate of food is useful for satisfying hunger.

Economic goal

The goal of economic activity is the satisfaction of human needs, which can be material or non-material. Material ends refer to the purely material enrichment of the individual. Non-material ends can be physical, moral, and intellectual development.

Economic Convenience

Economic convenience refers to the decision made by an individual or organization to acquire or use a good or service based on the relationship between the cost and the benefit it provides. In other words, it is about evaluating whether the benefit obtained from using or acquiring a good or service is greater than the cost that must be paid for it.

Economic convenience can vary from person to person, as it depends on the individual needs and preferences of each one. For example, for a person who works in an office, it may be convenient to acquire a vehicle to move more efficiently, while for another person who lives near their work and prefers to walk, it would not be convenient to acquire a vehicle due to the cost it represents.

Economic Operations

Economic operations involve the use of certain quantities of resources to obtain other resources that we consider more necessary and useful to achieve our objectives in a certain period of time. The resources we use to obtain the desired resource are known as “factors of production” or cost, while the resources we obtain in exchange are called “product”.

The elements of an economic operation include the cost we have incurred to obtain the desired product. That is, the value we have paid for the good or service we have acquired.

The Economic Process

The economic process is the set of activities that are carried out in an economy to produce, distribute, and consume goods and services. This process is divided into three main components: production, distribution, and consumption.

• Production: It is the process by which goods and services are created to satisfy the needs of consumers. Production is carried out using factors of production, which are land, labor, and capital. A simple example of production is the making of bread in a bakery, where ingredients (such as flour, water, and yeast) and the work of bakers are used to produce a good (bread) that is sold to consumers.
• Distribution: It is the process by which the goods and services produced are transported to the places where they are demanded. Distribution can be carried out by the producers themselves or by intermediaries such as wholesalers and retailers. A simple example of distribution is the transportation of bread from the bakery to points of sale such as stores or supermarkets.
• Consumption: It is the process by which consumers use goods and services to satisfy their needs and desires. Consumption can be individual or collective, and its level is determined by the purchasing power of consumers. A simple example of consumption is when a person buys bread in a store and consumes it to satisfy their hunger.

Branches of economics

Economics is divided into two main branches: microeconomics and macroeconomics.

Microeconomics

Microeconomics focuses on the analysis of the behavior of the simplest and smallest units and magnitudes of the economy, such as consumers, firms, workers, and investors, markets, and the remuneration of the productive factors, such as income, interest, wages, and profit.

Microeconomic analysis is divided into four main theoretical structures:

• Theory of consumption: It focuses on the analysis of how consumers make decisions about what goods and services to acquire and how to allocate their budget.
• Theory of production: It focuses on the analysis of how firms combine production factors to produce goods and services.
• Market theory: It focuses on the analysis of how prices are determined in markets and how goods and services are allocated.
• Distribution theory: It focuses on the analysis of how income is distributed and how productive factors are remunerated.

Learn more: Microeconomics