Introduction to economics

Economics is the social science that studies how individuals, businesses, governments and whole societies make choices about using scarce resources to satisfy their wants. An economy is the network of production, exchange and consumption of goods and services in a region or nation, together with the people, firms and institutions that carry it out.

The starting point for all of economics is the economic problem: human wants are unlimited, but the resources available to meet them (land, labour, capital and entrepreneurship) are limited. This gap is called scarcity. Because of scarcity, every decision means choosing between alternatives.

Three groups of economic agents make decisions. Consumers (households) decide what to buy, how much to save and how much work to offer. Producers (businesses) decide what to make, how to make it and what price to charge. Governments decide how much to tax, what to spend on and which rules to set. Each agent responds to costs and benefits, and the decisions of one agent become the conditions faced by the others.

Opportunity cost is the value of the next best alternative given up when a choice is made. It is not the sum of all alternatives, only the best one forgone. Other trade-offs include giving up time, quality, equity or environmental protection to gain something else. The cost-benefit principle says a rational decision-maker should proceed with an action only when its benefits exceed its costs.

Economists focus on marginal analysis: the extra benefit (marginal benefit) and extra cost (marginal cost) of one more unit. Decisions should continue until marginal benefit falls to equal marginal cost. Choices also have a time dimension, because a short-term gain (such as spending now) may carry long-term costs (such as lower savings later).

Incentives are rewards that encourage a behaviour (a tax rebate for installing solar panels), while disincentives are penalties that discourage it (a fine for littering). Policies can also create unintended consequences: a tax on cigarettes may cut smoking (intended) but encourage illegal imports (unintended).

Economists rely on data to shape public policy, monitor economic performance (for example GDP and unemployment figures) and forecast future conditions. They also use models, which are simplified representations of reality. Models depend on key assumptions, such as ceteris paribus (all other things held constant), which make complex situations easier to analyse but limit how well the results match the real world.

Behavioural economics challenges the assumption that people are always rational and self-interested by showing the influence of cognitive biases such as loss aversion, present bias and sunk cost thinking; it also raises ethical questions when firms or governments deliberately "nudge" behaviour.

Microeconomics studies individual markets, households and firms, while macroeconomics studies the whole economy (total output, unemployment, inflation). The two are linked: the sum of many micro decisions produces macro outcomes, and macro conditions shape micro choices. Economics helps explain and solve real-world problems such as housing affordability, climate policy and unemployment.