Basic Concepts of Economics: Definition, Classification, Branches, Problems, Methodology and Benefits

Basic Concepts of Economics – Since the writing and publication of a book entitled “The Wealth of Nation” in 1776 by Smith, economics has experienced rapid development. 1776 is often considered the birth year of economics. Smith is also called the father of economics.

Economics was growing and Smith’s ideas became the basis for other economists, namely Malthus, Ricardo, and John Stuart Mill. The later economists are classified as classical economists.

This classical economist was later developed by the Austrian School and then continued by Leon Walras, Alfred Marshall, and others in the 1890s, then gave birth to the development of a part of economic theory known as microeconomic theory .

The economic situation that occurred in the 1930s gave rise to new economists. In 1936, a book “The General Theory of Employment, Interest and Money” was born, published by John Maynard Keynes, a great economist who succeeded in giving birth to other works in the economic field.

The work convinced economists and stakeholders in overcoming the economic crises that were experienced at that time. These two major works in the world of science, especially economics, continue to grow in both developed and developing countries.

1. Definition of Economics

The word economy comes from the Greek word “oikonomia” , which means household management. The origin of the word “oikos” which means family or household, and “nomos” which means rules, rules, or law. ” Oikonomia ” is defined as the rules of society as a natural law that determines a good household.

Whereas science, according to the Big Indonesian Dictionary, is a field that is systematically arranged according to certain methods that can be used to explain certain phenomena in that field of knowledge.

So, economics as stated by the father of economics, Smith defines economics as systematically studying human behavior in an effort to allocate limited resources to achieve goals.

Sadono Sukirno (2016) in his book Microeconomics defines economics to analyze costs and benefits and improve patterns of resource use, both natural resources and human resources.

In a book entitled “Economic” by Paul Samuelson it is stated that economics is a study of the behavior of people and society in choosing to use scarce resources and have alternative uses in order to produce various commodities to continue distributing them both now and in the future to various individuals and groups in a society.

According to Bangun (2007), economics begins with the gap between available resources and human desires . As it is known that resources with human desires have different properties. Resources are limited in nature while human wants are unlimited. Then a gap arises between the two which results in problems related to the use of resources.

Robert B Ekelund Jr and Robert D Tollison explain, economics is that the study of how individuals and societies, experiencing virtually limitless wants, prefer to allocate scarce resources to best satisfy their wants.

Which means that economics is a science that studies how people and people who have unlimited wants choose to allocate limited resources to fulfill their wants.

Based on several definitions of economics put forward by experts, it is clear that economics is a science that studies human endeavors in meeting their unlimited needs with limited resources.

In understanding economics from understanding to other things, Sinaumed’s can read the book Introduction to Economics which is below.

2. Classification of Economics

a. Descriptive Economics

The descriptive economic group works by collecting information or factual information about economic problems and describing the actual economic situation in society.

Descriptive economics provides an explanation that involves initial determination (identification), providing understanding, compiling information, measuring conditions, and collecting data. With this activity, some knowledge is obtained about existing facts or empirical data, for example: the number of the workforce, the origin of economic institutions, the structure of labor unions, and so on.

b. Economic Theory (Economic Theory)

Economic theory (economic theory) is a science that studies theoretically and the basic concepts of individual and community behavior in determining the allocation of scarce resources in an effort to fulfill and improve the quality of life.

This means economic analysis that explains, seeks understanding, causal relationships, and the workings of the economic system. This economic theory is a conceptual framework derived from some real data that is compiled, processed, and tested so as to form general assumptions. This economic theory is divided into two, namely macroeconomics and microeconomics.

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1) Macroeconomics

Part of economics that specifically studies the working mechanism of the economy as a whole. Macroeconomics covers broad economic phenomena such as unemployment rates, economic growth rates, inflation, national income, and price levels. The goal of macroeconomics is to understand economic events and to formulate and improve economic policies. There are basic concepts in Macroeconomic Theory and this can be learned by Sinaumed’s in the book Introduction to Macroeconomics.


2) Microeconomics

Microeconomics is a part of economics that studies the behavior of individuals and production households or companies in making decisions to allocate limited resources. Examples are consumer or producer behavior, demand, supply, production costs, and others. Economics also learns about mathematical analysis which is discussed in the Microeconomic Theory book which is below.


c. Applied Economics

Applied economics (applied economics) means economics that examines theoretical economics to be applied in real life where it is practical and can be applied in various fields.

This applied economics is an analysis of theoretical economics to formulate appropriate policies and guidelines for dealing with economic problems on certain issues such as economics in companies, banking economics, and others.

As one of them is in making business decisions within a company that are in accordance with expectations and this is discussed in the book Managerial Economics by Iman Supriadi, ST., MM.

3. Branch of Economics

Economics is divided into eight branches, including:

a. Monetary economics

Monetary economics is a branch of economics that discusses money, banking and other financial institutions such as inflation , interest rates, the amount of money in circulation, and so on. Or simply, it is part of economics that studies the nature, function, and influence of money in various economic activities, which Sinaumed’s can learn from the book Monetary Economics: A Case Study of Indonesia.


b. Public economics

Public economics is a branch of economics that talks about government policies in the economy. Matters discussed in public economics include the APBN , APBD , government debt, taxes , levies, and others that Sinaumed’s can learn from in the book Public Economics by Bambang Suprayitno below.


c. Industrial economics

Industrial economics is a branch of economics that focuses on the interaction of companies in an industry. The interaction can be in the form of company performance or business competition. The discussion on this branch of industrial economics is included in the scope of microeconomics. You can learn about topics such as market structure, market competition behavior, monopolies and many others in the book Industrial Economics by Muhammad Teguh below.


d. International economics

International economics is defined as a branch of economics that discusses economic activity between countries. This economic activity can be in the form of trade transactions between countries, state investment flows, and balance of payments. International Economics itself has an important role in the international business cycle according to the International Economics book below.


e. Regional economics

Regional economics is a branch of economics which, among other things, discusses economic interactions between regions and the development process of a region. In order to better understand both the theory and practice of economics, Sinaumed’s can read the book Regional Economics Theory and Practice.


f. Natural resource economics

Natural Resource Economics (SDA) is a branch of economics which discusses the problems and optimal allocation of natural resources from an economic perspective. The subject matter of natural resource economics includes positive and negative externalities.

g. Human resource economics

Economics Human Resources (HR) is a branch of economics that discusses the factors of production of labor in. Discussions in this branch include: the issue of unemployment, minimum wages, and the education level of prospective workers which Sinaumed’s can learn from in the Revised Edition of The Economics of Human Resources: In Perspective of Development by Mulyadi Subri.


h. Islamic economics

Islamic economics is economics that aims to implement Islamic economics. The main points of discussion include the principle of profit sharing, the elimination of usury, zakat, and others which are discussed in the book Sharia Economics by Chatarina Vista Okta Frida below.


4. Economic Problems

In general, people must have diverse needs ranging from personal needs to community needs, both primary needs, secondary needs, and tertiary. Human needs are unlimited while the means of satisfying needs are very limited. This is the main problem in economics, where there is a gap between expectations and reality, there is a gap between needs and means of satisfying needs.

a. According to the classical flow

The main economic problems according to the classical school are production (human activities to produce goods or services), distribution (activities of channeling goods or services from producers to consumers), and consumption (human activities reduce the use value of a product, namely goods or services).

b. According to the modern flow

The main economic problems according to modern schools are what (what), how (how), and for whom (for whom). What means what goods and services will be produced and in what quantity.

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To determine production, one must understand the goods needed by society, so it is necessary to take into account natural resources and human resources. How means discussing the process of the goods being made and how to combine the factors of production or natural resources in production . With limited economic resources available, producers must be able to combine.

For whom (for whom the goods are produced) means for whom the goods will be produced or for which layer of society will enjoy the goods and services provided and how the goods and services will reach the hands of consumers.

In studying economic issues, the book Contemporary Problems of the National and Regional Economy below specifically discusses various national economic issues such as exchange rates, exports of the manufacturing industry, and many more.


5. Methodology of Economics

In general, the method of economics in analyzing economic problems starts from observing the object of the problem, determining the relationship of the problem with related economic theory, determining hypotheses, identifying problems through questions, determining the variables to be studied, and determining the assumptions and models used to obtain solution.

a. Make observations and choose a theory

Observation and theory also have a relationship in the economic field. For example: an economist who lives in another country outside Indonesia experiencing an increase in the price of goods is quickly moved to make observations of this phenomenon. The economist can use the theory of inflation.

This theory could conclude that high inflation occurs because the government prints too much money. To confirm this theory, the economist collects data on price increases and the amount of money in circulation from several different countries.

If the amount of money printed has no effect on price increases, the economist will doubt the suitability of the inflation theory to explain the conditions under study. If these facts have a strong correlation with price increases, the economist will be more convinced of the truth of the inflation theory.

b. Identify problems and determine variables and hypotheses

The next methodology is to identify the problem in the form of a question. Questions that will be asked to parties related to the object to be analyzed must be precise so that problems can be identified clearly.

Then the appropriate variables can be determined in determining hypotheses or temporary answers to the problems that occur, economics uses the ceteris paribus assumption. The term ceteris paribus assumption is often used to simplify various formulations and descriptions of various economic assumptions.

According to the definition of ceteris paribus, the focus of attention is only on certain variables. While the other variables do not affect the analysis being carried out. After the hypothesis is obtained, then a hypothesis test is carried out by focusing on the variables studied. At the same time, other factors are assumed to be considered in the trial.

c. Using assumptions and models

The limitations commonly faced by economics include:
1) The object of research in economics cannot be localized.
2) In economics, humans are the subject and object of investigation. Therefore the conclusions and generalizations generated cannot be absolute.
3) Economics does not have a laboratory to conduct economic experiments.

Some economists devise a theory, collect data, then analyze the data to prove the theory. To draw a conclusion, economists usually use the model assumption method.

Economists make assumptions to simplify a complex problem to make it easier. To examine the effect of international trade, for example, it can be assumed that there are only two countries that produce two types of goods in the world.

Even though the world actually consists of hundreds of countries, each country produces different types of goods. By understanding international trade in the assumption of two countries and two types of goods, it will be easier to understand international trade .

6. Benefits of Economics

Everyone needs to master or study economics because everyone may face scarcity in meeting their needs. Some of the benefits of studying economics include:

a. Teaches ways of thinking that can be used every day when you need to make decisions

The way of thinking in question is the three fundamental concepts in economics, namely opportunity costs, marginality, and efficient markets. Opportunity cost is the best alternative that is sacrificed or stopped when making a decision.

Marginality is the process of analyzing the additional costs or benefits that arise from a decision. And an efficient market is a market where the opportunity to earn profits is almost instantly eliminated because some people are looking for the same profit opportunities so there are only a few opportunities left.

b. To understand society better

By studying economics, you can find answers to several questions such as why people decide to shop, build buildings, buy transportation or manufacture it, build factories, and so on.

c. To understand global issues

A good understanding of economics is very important in helping one understand the world’s problems. Just an example of war in other countries. The war in Iraq and the Venezuelan attack in 2003 caused the world oil market to experience turmoil which resulted in rising energy costs around the world.

Recommendations for Economic Books and Articles

For those of you who are studying economics, here are some recommendations for studying economics that you can have:

1. Globalization, Constitutional Economics, and the Economics Nobel

2. Monetary Economy: Case Study of Indonesia

3. Indonesian Economic Politics

Wake up, Wilson. 2007. Microeconomic Theory. Bandung: PT Refika Aditama.
Sukurno, Sadono. 2016. Microeconomics. Jakarta: Raja Grafindo Persada.