Nature and Importance of Economics

Economics is generally described as both a science and an art. It is a science because it studies cause-and-effect relationships between economic variables (such as price and quantity demanded) in a systematic way, using logical methods and, increasingly, statistical and mathematical tools — this is the same reasoning that justifies calling economics a 'social science' rather than a purely descriptive subject. It is also an art, because economic theory is applied in practice to solve real problems — a government uses economic principles to design a budget, and a business uses them to price a product.

Studying economics matters at three levels:

• For an individual, economics helps in making everyday decisions with a limited income — what to buy, how much to save, and how to get the most satisfaction from a fixed budget.
• For a business firm, economics is the basis of decisions about what to produce, how much to produce, what price to charge, and how to combine labour and capital at least cost.
• For the government, economics provides the tools to frame policy — taxation, public spending, control of inflation, employment generation and long-term planning for growth — all rest on economic analysis. …