What Are the Four Elements of Studying Economics?
Economics is a science, but it is not like the sciences, such as biology and chemistry, with which you associate chemicals and organisms. It is a social science that studies people, business, the economy, and the production and consumption behaviors of these entities. Economics acknowledges the fact that resources are scarce, and it attempts to find ways in which to allocate those resources in the most efficient means possible. A student of economics must develop the thinking patterns necessary to understand the subject matter. There are 10 principles of economics. The Limkokwing University of Creative Technology effectively extracts the most relevant information from the 10 principles to create "four elements of the economic way of thinking."
1 Make Assumptions
The first element students must understand is that assumptions are frequently used to make the subject matter understandable and to focus on the relevant subject matter. Economics is a science, but it is not an exact science. Economic theory simplifies situations because it would be nearly impossible to predict and include every relevant variable and factor. For instance, an economist is attempting to determine how much unemployment rates will rise over the next six months. If he considered every variable that impacts unemployment rates, he would be working with millions of variables, some of which are difficult to measure. For this reason, he simplifies the situation and focuses on only the most relevant variables to study the unemployment situation.
2 Ceteris Paribus
The second element relates to the first. Ceteris paribus, or "all other things being held constant," is a common term used in economics to simplify graphs and other economic analyses. This term indicates that only the stated variables indicated on the graph or stated in the situation exist in the hypothetical world, and you need not be concerned with any other values for the purpose of that specific graph or situation, as everything else is "held constant." Students who are new to economics often have trouble accepting the ceteris paribus idea, because they find it difficult to simply ignore variables they feel are relevant.
3 Thinking at the Margin
The book "Principles of Economics" describes the manner in which economics uses marginal thinking to make decisions. Rational people realize that decisions often involve a grey area. Marginal change is described by the book as a small incremental adjustment to an order of business or plan of action. Rational people examine the marginal benefit and marginal cost associated with a given decision, and if the marginal benefit exceeds the marginal cost, the action is worth taking.
An incentive is something that entices an entity to act or react in a certain manner. "Principles of Economics" describes how people respond to incentives. If the price of a good rises, the demand for that good generally falls. People compare costs and benefits, so they generally respond to low prices and avoid high prices. Incentives are relevant, as they indicate how markets work and how scarce resources are allocated.