Economics Online Tutor
Basics of Economics, Continued |
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| Goods and services: In the study of economics, the term "goods and services" is often encountered. Some comments about terminology would be appropriate at this time. "Goods" refers to physical products, while "services" refers to non-physical products. In terms of what is available for sale, an example of a good is a new car on a car lot. An example of a service is a housecleaning service. For many types of economic analysis, these terms are used together to indicate that the analysis applies to both together; thus the term "goods and services". Because this is used so often in economics, it becomes somewhat cumbersome to continuously repeat this term. Sometimes, in order to avoid this repetition, economists and economics textbooks may use the term "goods" to refer to "goods and services". This second meaning of the term "goods" may seem at times to be confusing, but the context that it is used in should allow you to know which meaning is being used in each instance. Some other terminology to be familiar with: Economic good: Something that wouldn't exist in sufficient quantities if it were free. This covers the vast majority of goods. Free good: Something that there would be enough of even if it were free. It is very difficult to find a real-world example of a free good. Some people say that air is a free good, but in some locations, "clean air" is not free; there is a cost involved. Economic bad: Something that people pay to have less of. Pollution, for example. Resources, or economic resources: Anything used in the production of other goods and services. These include land, labor, and capital. Land: This includes such things as minerals, timber, and water, as well as the actual land itself. Labor: The physical and intellectual services of people. This includes training, education, and peoples' abilities. Entrepreneurship is a special class of labor, but some economists have classified it as a fourth type of resource. Capital: Manufactured products such as machinery and equipment that are used in production. Capital in this sense is separate from forms of financial backing such as stocks, bonds, etc. Those kinds of assets are known as financial capital, as opposed to physical capital. In terms of factors of production, capital only refers to physical capital. These different types of resources produce earnings of their own, and these earnings all have their own terminology: land earns rent, labor earns wages, and capital earns interest. If entrepreneurship is listed as a fourth type of resource, then its earnings would be called profit. |
| The study of economics is generally divided into two broad categories: microeconomics and macroeconomics. Microeconomics is the study of economics on the individual level: the individual firm, the individual consumer, the individual worker. Macroeconomics is the study of economics at the level of the economy as a whole, or an entire industry or sector of the economy as a whole. Economic sectors are classified as the consumer, or household sector, the business sector, the government sector, and the international sector. One last note about the study of economics: it is often talked about, and joked about, the fact that economists tend to disagree on about everything. Since economists, who are supposed to be the experts in the field, cannot agree or come to a consensus, then people, and especially government officials, often suggest that their own instincts and opinions are just as good as anybody else's, including the so-called expert economists. These people often draw erroneous conclusions by making this assumption. The truth is, economists actually agree on almost everything. One thing that economists always agree on is the logic of economics itself, something that often gets excluded by other people, including politicians. The few things open for disagreement are the only things that the public sees regarding economic thought. Since the public sees only the disagreements, they falsely conclude that disagreements among economists is the norm. There are very good reasons behind the disagreements that do exist. Economies are very complex. They involve literally millions of inter-relationships and transactions every day. In order to be able to draw conclusions, economists develop simplified models to explain these relationships one at a time. Mentioned earlier in this section is the term "ceteris paribus", which is a Latin term meaning "other things being equal". This means that economists assume that the other millions of relationships are irrelevant to the study at hand. But this assumption only holds true within the economic model, the theory being studied. In the real world other things never remain constant. Isolating specific relationships does yield valuable, statistical correlations that aid in the understanding of how things work. Remember, though, that correlation does not prove cause and effect. Keeping the assumptions in mind, and having the ability to understand what changes from the theory to the real world when the assumptions are lifted, often separate the "good" economists from the rest. Economists have used many studies to create many simplified models of the complex world. Sometimes, the complexity is compounded by the fact that the relationships studied take time to develop in the real world. By the time they do, other factors will change. The result of all the complexity is that different interpretations of the conclusions that can be drawn from looking at different models will exist. This is one of the causes of disagreements among economists, and has led to different economic "schools of thought". These differences often show up in public as being associated with different political philosophies. It doesn't mean that economists cannot agree on anything, and it doesn't mean that economic study is not worthwhile. Another criticism of economists is that they are not 100% accurate in their predictions. But they are not supposed to be 100% accurate. That is not their jobs, and they don't claim that it is. Their jobs are to study the models, the evidence that they have at their disposal, compare that to the current and complex real world situation, and draw conclusions based on what they believe is likely to occur based on the information that they have at hand. These are economic forecasts, not quite the same thing as predictions of the future. But the complexity of the real world, compounded by the fact that future decisions will be made by imperfect humans, means that "results may vary" when it comes to forecasts about the economy. This section covers the basics. It should give you a background for studying the various topics in economics. Where to begin? This site is designed for flexibility: different people use it for different purposes. I have included a series of tabs and links to make navigation through the various topics as easy as possible. Many users of this site are looking for an explanation of a specific topic that they are studying in economics class. Each topic should be relatively easy to find: start with the tabs and links on the home page. Perhaps you are unsure of where a specific topic would be located, or you want an even easier way to jump to a specific topic: start with the glossary section. The glossary section is handy because it lists all of the economics terms that appear within this site, along with a handy definition as used in economics for each term. Perhaps that definition will answer your specific question. If not, or if you want to learn more, each term itself is a link to a page within this site where that term is used in context. Perhaps you want to use this site for an overall study of economics. In that case, you would want to systematically work through different sections. In that case, keep in mind that the topics build on one another, so you would want to proceed through them in order. Some people prefer to begin with microeconomic topics, some prefer to begin with macroeconomic topics. If you begin with macroeconomics, you will want to be aware that it assumes some prior knowledge of some of the concepts involved with the study of supply & demand, which is part of microeconomics. So start with supply & demand, and then jump to macroeconomics. |