The word " Economy " comes from the Greek word for " one who manages a household ".
A household faces many decisions. It must decide which members of the household do which tasks and what each member gets in return : Who cooks dinner ? Who does the laundry ? Who gets the extra dessert at dinner ? Who gets to choose what TV show to watch ? In short, the household must allocate its scarce resources among its various members, taking into account
each member's abilities, efforts, and desires.
Analogy to society !
Like a household, a society faces many decisions. A society must decide what jobs will be done and who will do them. It needs some people to grow food, other people to make clothing, and still others to design computer software. Once society has allocated people (as well as land, buildings, and machines) to various jobs, it must allocate the output of goods that they produce.
Economics is the study of how society manages its scarce resources.
The Scientific Method : Observation, Theory, and More Observation
Issac Newton, the famous seventeenth-century scientist and mathematician, allegedly became intrigued one day when he saw an apple fall from an apple tree. This observation motivated Newton to develop a theory of gravity that applies not only to an apple falling to the earth but to any two subjects in the universe. Subsequent testing of Newton's theory has shown that it works well in many circumstance (although, as Einstein would later emphasize, not in all
circumstance).
Microeconomics and Macroeconomics
Many subjects are studies on various levels. Consider biology, for example. Molecular biologists study the chemical compounds that make up living things. Cellular biologists study cells. which are made up of many chemical compounds and, at the same time, are themselves the building blocks of living organisms.
Economics is also studies on various levels. We can study the decisions of individual households and firms. Or we can study the interaction of households and firms in the markets for specific goods and services. Or we can study the operation of the economy as a whole, which is just the sum of the activities of all these decision-makers in all these markets.
The field of economics is traditionally divided into two broad sub-fields.
Microeconomics is the study of how households and firms make decisions and how they interact in specific markets.
Macroeconomics is the study of economy-wide phenomena.
A microeconomist might study the effects of rent control on housing in New York City, the impact of foreign competition on the U.S. auto industry, or the effect of compulsory school attendance on workers' earnings. A macroeconomist might study the effects of borrowing by the federal government, the changes over time in the economy's rate of unemployment, or alternative policies to raise growth in national living standards.
