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Economics Defned

What is economics? Economicsis the study o how society allocates scarce

resources and goods. Resourcesare the inputs that society uses to produce

output, called goods. Resources include inputs such as labor, capital, and land.

Goods include products such as ood, clothing, and housing as well as servicessuch as those provided by barbers, doctors, and police ocers. !hese resources and

goods are considered scarcebecause o society"s tendency to demand more

resources and goods than are available.

Economic Policy

An economic policyis a course of action that is intended to influence or control the behavior ofthe economy. Economic policies are typically implemented and administered by the government.

Examples of economic policies include decisions made about government spending and taxation,

about the redistribution of income from rich to poor, and about the supply of money. The

effectiveness of economic policies can be assessed in one of two ways, known as positiveand

normativeeconomics.

Positive and normative economics. Positive economicsattempts to describe how the economy

and economic policies work without resorting to value judgments about which results are best.

The distinguishing feature of positive economic hypotheses is that they can be testedand eitherconfirmed or rejected. For example, the hypothesis that an increase in the supply of money

leads to an increase in prices! belongs to the realm of positive economics because it can be testedby examining the data on the supply of money and the level of prices.

Normative economicsinvolves the use of value judgmentsto assess the performance of the

economy and economic policies. "onse#uently, normative economic hypotheses cannot be

tested. For example, the hypothesis that the inflation rate is too high! belongs to the realm ofnormative economics because it is based on a value judgment and therefore cannot be tested,

confirmed, or refuted. $ot surprisingly, most of the disagreements among economists concern

normative economic hypotheses.

Goals of economic policy. The goals of economic policyconsist of value judgments about whateconomic policy should strive to achieve and therefore fall under the heading of normative

economics. %hile there is much disagreement about the appropriate goals of economic policy,

several appear to have wide, although not universal, acceptance. These widely accepted goalsinclude&

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'. Economic growth:Economic growth means that the incomes of all consumers and firms

(after accounting for inflation) are increasing over time.

*. Full employment:The goal of full employment is that every member of the labor forcewho wants to work is able to find work.

+. Price stability:The goal of price stability is to prevent increases in the general price

level known as inflation, as well as decreases in the general price level known as

deflation.

References

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