Economics

Supply and demand, comparative advantage, and behavioral economics

What is economics?

Economics studies how people, businesses, and societies allocate limited resources to satisfy their wants and needs — decisions about what to produce, how to produce it, and who gets what, made under the basic constraint that resources are always finite.

Supply and demand

One of the most fundamental ideas in economics is the relationship between supply and demand. Demand describes how much of a good or service people are willing to buy at a given price — generally, the lower the price, the more people want to buy. Supply describes how much producers are willing to sell at a given price — generally, the higher the price, the more producers want to sell. The price where these two tendencies balance is called the equilibrium price, and markets tend to move toward this balance over time.

Microeconomics and macroeconomics

Economics is generally divided into two broad areas. Microeconomics studies individual decision-makers — how a single consumer decides what to buy, or how a single business decides what to produce and at what price. Macroeconomics studies the economy as a whole — overall economic growth, unemployment, inflation, and the policies governments use to influence these broad, economy-wide outcomes.

Trade and specialization

Economics also explains why trade between individuals, businesses, or countries is generally beneficial to both sides: when different parties specialize in producing what they're relatively best at and trade for everything else, the total amount produced and available tends to increase compared to everyone trying to produce everything themselves.

Why economics matters

Economics provides the analytical framework behind decisions made by businesses, governments, and individuals every day, from setting interest rates and taxes to a household's own budgeting choices, and it offers systematic, evidence-based tools for understanding growth, unemployment, and the effects of different policy choices.