All of us have heard a word such as “economics” many times in our lives. This term is often mentioned on the TV news, in newspaper articles and in the day-to-day conversations of those around us.

But what does this concept mean?

To put it simply, economics is the study of how people interact with each other in the process of production and distribution of what they consume.

Economics studies the human society the same way as physics studies the physical world.

For sure, a human being isn’t an elementary particle, but his behavior obeys certain laws. These laws are objective and beyond our control just like the laws of nature. That’s why going against the laws of economics is the same as going against the laws of nature: such conduct will backfire.

You might wonder whether economists can draw useful conclusions from the laws of economics in order to improve people’s lives, and if so, how they can do it.

And the answer to your question is yes.

Conclusions on the laws that the human society obeys are drawn by economists based on the following premises:

1) Resources are limited, whereas needs are limitless

A need to take economic decisions as well as an exploration of how people cope with economic challenges stems from the fact that the resources of our planet are limited, and human needs are limitless.

It can be concluded that in heaven, a place in which everything is in abundance and people don’t have desires and needs, there would be no need for economists. But here on Earth, we are forced to distribute benefits and resources, the amount of which is finite.

In this regard, economic agents, that is, people, households, businesses and public bodies participating in the process of production and distribution, constantly face a choice between buying apples or pears, putting money in a bank account or investing their savings in stocks, getting a job at a factory floor or at the office, manufacturing cars or tanks, etc.

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2) People are rational creatures

The basic axiom of economics assumes that people make their choices rationally. This assumption usually raises many questions. Judging by the way we act and looking at mistakes we make, it sometimes appears that our behavior can be called anything but rational.

However, the concept called “rationality” shouldn’t be taken literally. It is mostly understood by economists as the fact that people don’t take decisions in a random way. Underlying their behavior is a comparison between benefits and costs arising from a particular action.

If, in someone’s opinion, benefits of an action exceed costs resulting from it, he or she will perform this act, and if they don’t, he or she won’t go for it.

The assumption described above is valid for making even the most insignificant decisions. You can test it on yourself. Imagine that you are sitting on the couch in front of the TV, and you suddenly feel like drinking tea. Whether or not you’ll go to the kitchen depends on which of the actions will outweigh: the pleasure of drinking tea or costs associated with getting up from the couch, making it to the kitchen and getting some tea, in addition to missing a portion of a TV show.

In such a case, you make a decision immediately, or in other words, on a subconscious level, without taking cognizance of what is the reason for taking a particular option.

However, as the extent of benefits and costs grows, you’ll regard a comparison between those benefits and costs with greater care.

An important finding that emerges from the above is that economic agents respond to incentives. Once in different settings, the same people will be hard-working and adventurous or lazy and passive. And it’s all because with the change of circumstances, benefits and costs arising from a person’s actions also undergo changes. And at the same time, the person himself doesn’t change: he goes on comparing between benefits and costs and acts in accordance with his personal economical gain.

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Based on the two main prerequisites described above economists seek to draw the useful conclusions from the laws of economics and make people’s lives better.

That’s pretty much all we wanted to tell you about what economics studies, and we hope you will continue to build up the knowledge of economic theory and apply it in your life.

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