Economics Basics: Introduction

By Reem Heakal

Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants.

As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, as a result, you must make certain choices with your money. You'll probably spend part of your money on rent, electricity and food. Then you might use the rest to go to the movies and/or buy a new pair of jeans. Economists are interested in the choices you make, and inquire into why, for instance, you might choose to spend your money on a new DVD player instead of replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack. The underlying essence of economics is trying to understand how both individuals and nations behave in response to certain material constraints. ((To learn how economic factors are used in currency trading, read Forex Walkthrough: Economics.)

We can say, therefore, that economics, often referred to as the "dismal science", is a study of certain aspects of society. Adam Smith (1723 - 1790), the "father of modern economics" and author of the famous book "An Inquiry into the Nature and Causes of the Wealth of Nations", spawned the discipline of economics by trying to understand why some nations prospered while others lagged behind in poverty. Others after him also explored how a nation's allocation of resources affects its wealth.

To study these things, economics makes the assumption that human beings will aim to fulfill their self-interests. It also assumes that individuals are rational in their efforts to fulfill their unlimited wants and needs. Economics, therefore, is a social science, which examines people behaving according to their self-interests. The definition set out at the turn of the twentieth century by Alfred Marshall, author of "The Principles Of Economics" (1890), reflects the complexity underlying economics: "Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man."

Source : http://www.investopedia.com

Read more: Economics Basics: Introduction | Investopedia http://www.investopedia.com/university/economics/#ixzz3kNcLuspH 

Follow us: Investopedia on Facebook

Read More

Unit One - Basic Economic Concepts

Wants - Simply the desires of citizens. Wants are different from needs as we will see below. Wants are a means of expressing a perceived need. Wants are broader than needs.

Needs: These are basic requirements for survival like food and water and shelter. In recent years we have seen a percieved shift of certain items from wants to needs. Telephone service, to many, is a need. I would argue, however, that they are wrong.

Scarcity - the fundemental economic problem facing ALL societies. Essentially it is how to satisfy unlimited wants with limited resources. This is the issue that plagues all governmet and peoples. How do we conquor the issue of scarcity? Many people have thoaught they had the answer (see Marx, Smith, Keynes, etc.) but the issue of scarcity still exists.

Factors of Production/Resources - these are those elements that a nations has at its disposal to deal with the issue of scarcity. How efficiently these are used determines the measure of success a nation has. They are

• Land - natural resources, etc.
• Capital - investment monies.
• Labor - the work force; size, education, quality, work ethic.
• Entrepreneurs - inventive and risk taking spirit. This is a rather new addition to a tradirtional list.

The "Three Basic Economic Questions" - these are the questions all nations must ask when dealing with scarcity and effcientlly allocating their resources.

• What to produce?
• How to produce?
• For whom to produce?

Economics - Economics is the study the production and distribution of goods and services, it is the study of human efforts to satisfy unlimited wants with limited resources.

Opportunity Cost - the cost of an economic decision. The classic example is "guns or butter." What should a nation produce; butter, a need, or guns, a want? What is the cost of either decsion? If we choose the guns the cost is the butter. If we choose butter, the cost is the guns. nations bust always deal with the questions faced by opportunity cost. It is a matter of choices. Resources are limted thus we cannot meet every need or want.

Free Products: Air, sunshine are and other items so plentiful no one could own them.

Economists are interested in "economic products" - goods and services that are useful, relatively scarce and transferable.

Good: tangible commodity. These are bought, sold, traded and produced.

Consumer Goods: Goods that are intended for final use by the consumer.

Capital Goods: Items used in the creation of other goods. factory machinary, trucks, etc.

Durable Goods: Any good that lasts more than three years when used on a regular basis.

Non Durable Goods: Any item that lasts less than 3 years when used on a regular basis.

Services: Work that is performed for someone. Service cannot be touched or felt.

Consumers: people who use these goods and services.

Conspicuous Consumption: Use of a good or service to impress others.

Value: An assignment of worth. The assignment is usually based upon the utility (usefulness) or scarcity of the item (supply and demand).

Utility: capacity to be useful.

Paradox of value: assignment of the highest value to those things we need the least, like water and the highest things we often don't need at all like diamonds. Why do we do this? Good question. I do not have an answer.

Wealth: the sum collection of those economic products that are tangible, scarce and useful.

Productivity - the ability to produce vast amounts of goods (economic products) in an efficient manner. The American capilist economy is productive because:

• We use our resource efficiently.
• We specialize to increase efficiency and productivity.
• We invest in Human Capital (our labor pool)

Source : http://www.socialstudieshelp.com

Read More

Positive Versus Normative Analysis in Economics

While economics is largely an academic discipline, it is quite common for economists to act as business consultants, media analysts, and advisers on government policy. As a result, it's very important to understand when economists are making objective, evidence-based statements about how the world works and when they are making value judgments about what policies should be enacted or what business decisions should be made.

Positive Analysis

Descriptive, factual statements about the world are referred to as positive statements by economists. The term "positive" isn't used to imply that economists always convey good news, of course, and economists often make very, well, negative positive statements. Positive analysis, accordingly, uses scientific principles to arrive at objective, testable conclusions.

Normative Analysis

On the other hand, economists refer to prescriptive, value-based statements as normative statements. Normative statements usually use factual evidence as support, but they are not by themselves factual. Instead, they incorporate the opinions and underlying morals and standards of those people making the statements. Normative analysis refers to the process of making recommendations about what action should be taken or taking a particular viewpoint on a topic.

Examples of Positive vs. Normative

The distinction between positive and normative statements is easily shows via examples. The statement

The unemployment rate is currently at 9 percent.

is a positive statement, since it conveys factual, testable information about the world. Statements such as

The unemployment rate is too high.

The government must take action in order to reduce the unemployment rate.

are normative statements, since they include value judgments and are of a prescriptive nature. It's important to understand that, despite the fact that the two normative statements above are intuitively related to the positive statement, they cannot be logically inferred from the objective information provided. (In other words, they don't have to be true given that the unemployment rate is at 9 percent.)

How to Effectively Disagree With an Economist

People seem to like disagreeing with economists (and, in fact, economists often seem to enjoy disagreeing with one another), so it's important to understand the distinction between positive and normative in order to disagree effectively.

To disagree with a positive statement, one must bring other facts to the table or question the economist's methodology. In order to disagree with the positive statement about unemployment above, for example, one would have to make the case that the unemployment rate isn't actually 9 percent. One could do this either by providing different unemployment data or by performing different calculations on the original data.

To disagree with a normative statement, one can either dispute the validity of the positive information used to reach the value judgment or can argue the merits of the normative conclusion itself. This becomes a more murky type of debate, since there is no objective right and wrong when it comes to normative statements.

In a perfectly organized world, economists would be pure scientists who perform only positive analysis and exclusively convey factual, scientific conclusions, and policy makers and consultants would take the positive statements and develop normative recommendations. In reality, however, economists often play both of these roles, so it's important to be able to distinguish fact from opinion, i.e. positive from normative.

Source : about.com

Read More

Economics Basics: Introduction

By Reem Heakal
Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants.

As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, as a result, you must make certain choices with your money. You'll probably spend part of your money on rent, electricity and food. Then you might use the rest to go to the movies and/or buy a new pair of jeans. Economists are interested in the choices you make, and inquire into why, for instance, you might choose to spend your money on a new DVD player instead of replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack. The underlying essence of economics is trying to understand how both individuals and nations behave in response to certain material constraints. ((To learn how economic factors are used in currency trading, read Forex Walkthrough: Economics.)


We can say, therefore, that economics, often referred to as the "dismal science", is a study of certain aspects of society. Adam Smith (1723 - 1790), the "father of modern economics" and author of the famous book "An Inquiry into the Nature and Causes of the Wealth of Nations", spawned the discipline of economics by trying to understand why some nations prospered while others lagged behind in poverty. Others after him also explored how a nation's allocation of resources affects its wealth.


To study these things, economics makes the assumption that human beings will aim to fulfill their self-interests. It also assumes that individuals are rational in their efforts to fulfill their unlimited wants and needs. Economics, therefore, is a social science, which examines people behaving according to their self-interests. The definition set out at the turn of the twentieth century by Alfred Marshall, author of "The Principles Of Economics" (1890), reflects the complexity underlying economics: "Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man."


Source : investopedia.com
Read more: Economics Basics: Introduction | Investopedia http://www.investopedia.com/university/economics/#ixzz3kBg2b8TU
Follow us: Investopedia on Facebook

Read More

The Difference Between Finance And Economics

By Stephen D. Simpson, CFA

Although they are often taught and presented as very separate disciplines, economics and finance are interrelated and inform and influence each other. Investors care about these studies because they also influence the markets to a great degree. Here we take a look at finance and economics, what they can teach investors and how they differ. (For background reading, see Is finance an art or a science?)

Tutorial: Economics BasicsECONOMICS
What is it?
Without falling back on dry academic definitions, economics is a social science that studies the production, consumption and distribution of goods and services, with an aim of explaining how economies work and how their agents interact. Although labeled a "social science" and often treated as one of the liberal arts, modern economics is in fact often very quantitative and heavily math-oriented in practice.

How is economics useful?
When economists succeed in their aims to understand how consumers and producers react to changing conditions, economics can provide powerful guidance and influence to policy-making at the national level. Said differently, there are very real consequences to how a nation approaches taxation, regulation, and government spending; economics can offer advice and analysis regarding these decisions.

Economics can also help investors understand the potential ramifications of national policy and events on business conditions. Understanding economics can also give investors the tools to predict macroeconomic conditions and understand the implications of those predictions on companies, stocks, markets and so on. Being able to project that a certain set of government policies will stoke (or choke off) inflation or growth in a country can certainly help stock and bond investors position themselves appropriately.

Economics as a career
For those who choose to pursue economics as a career, academia is an obvious option. Academics not only spend their time attempting to teach students the principles of economics, but also researching within the field and formulating new theories and explanations of how markets work and how their agents interact.

There is also call for economists in the corporate world. Here the concerns of economists are more immediate and near-term. Economists working for major investment banks, consultancies, and other corporations often focus on forecasting growth (GDP, for instance), interest rates, inflation, and so on. These projections may represent a product in their own right (that can be marketed to clients) or an input for managers and other decision-makers within the company. (To learn more about important contributions by economists, see How Influential Economists Changed Our History.)

Economics in the markets
Investors have an erratic history with economists, listening to them carefully at some times and all but ignoring them at others. While some investors may ignore economists' concerns and pile their investments into the latest booming sector, others will carefully track data on GDP, inflation and deficits to inform their investing decisions. It also matters which market is being considered; bond investors typically tend to pay more attention to economic data than many equity investors do. (Discover the theories that shaped the way we've come to understand economics. Check out The History Of Economic Thought.)

FINANCE
What is it?
Finance in many respects is an offshoot or outgrowth of economics, and many of the notable achievements in finance (at least within academia) were made by individuals with economics backgrounds and/or positions as professors of economics. Finance generally focuses on the study of prices, interest rates, money flows and the financial markets. Thinking more broadly, finance seems to be most concerned with notions like the time value of money, rates of return, cost of capital, optimal financial structures and the quantification of risk.

How is finance useful?
While economics offers the pithy explanation that the fair price of an item is the intersection of supply, demand, marginal cost and marginal utility, that is not always very useful in actual practice. People want a number, and many billions of dollars are at stake in the proper pricing of loans, deposits, annuities, insurance policies and so forth. That is where finance comes into play – in establishing the theoretical understandings and actual models that allow for the pricing of risk and valuation of future cash flows

Finance also informs business managers and investors on how to evaluate business proposals and most efficiently allocate capital. Basically, economics posits that capital should always be invested in a way that will produce the best risk-adjusted return; finance actually figures that process out.

Finance as a career
In some respects, a degree or academic background in finance opens more obvious doors than a similar background in economics. A degree in finance is a common denominator among many of those who populate Wall Street, be they analysts, bankers or fund managers. Likewise, many of those who work for commercial banks, insurance companies and other financial service providers have college backgrounds in finance. Apart from the finance industry itself, a degree in finance can be a pathway into and through the senior management of companies and corporations. (Think this career is right for you? Learn more about how to get in - and how to succeed. Check out Becoming A Financial Analyst.)

In the markets
As finance tries to concern itself with assessing the value of financial instruments, it is not surprising that one of the most common applications of finance in the markets is in the determination of fair value for a wide range of investment products. Stock-pricing models like the capital asset pricing model, option models like Black-Scholes, and bond concepts like duration are all byproducts of applied finance in an investment context.

Finance also offers new theories about the "right" way to do things, whether that is the optimal dividend or debt policy for a corporation or the proper asset allocation strategy for an investor.

It can also be argued that finance affects the markets with a seemingly constant stream of new products. Although many derivatives and advanced financial products have been maligned in the wake of the Great Recession, the fact remains that many of these instruments were designed to address and solve market demands and needs.

The Bottom Line
It is important for investors to avoid "either/or" arguments regarding economics and finance; both are important, and both have valid uses and applications. In many respects, economics is "big picture" (how a country/region/market is doing) and concerned about public policy, while finance is more company/industry-specific and concerned about how companies and investors evaluate and price risk and return. Historically, economics has been more theoretical and finance more practical, but this has changed in the last 20 years.

It is interesting to note, though, that the two disciplines seem to be converging in some respects. It seems that academics in finance are trying to incorporate more and more theory into their work and appear more academically rigorous. At the same time, there is at least a movement within some schools of economics to lean more heavily on math and appear practical and applicable to everyday business and policy decision-making processes. (This decision-making tool integrates the idea that every decision has an impact on overall risk. See Multivariate Models: The Monte Carlo Analysis.)

At some fundamental level, there will always be a separation, but both are likely to remain very important to the economy and financial markets for some time to come.

Get Out of Debt – Start Making Money
Want to get out of debt, get a mortgage and save for retirement? Investopedia’s FREE Personal Finance newsletter shows you 7 Steps to Become Financially Independent. Take control of your money and Click here to start managing your finances like the pros.

Source : investopedia.com

Read more: The Difference Between Finance And Economics http://www.investopedia.com/articles/economics/11/difference-between-finance-and-economics.asp#ixzz3kBa0AVrS
Follow us: Investopedia on Facebook

Read More