Economics is all about how individuals, business, and governments allocate limited resources among various needs and wants. Basic economic analysis uses an assortment of tools and methods to understand the decisions made in this process. The tools of basic economic analysis range from supply-and-demand charts to complex statistical models.
A central fact of economics is that resources are scarce. Because individuals, firms, and governments do not have unlimited supplies of time, money, labor, materials, and other resources, they must set priorities and decide how to allocate resources.
A central assumption of basic economic analysis is that families, companies, and nations strive to allocate resources in such a way that will yield the most satisfaction at the least cost. Economists call that "rational self-interest."
Supply-and-demand graphs are the most basic tools for economic analysis, and are frequently taught in basic economics courses. The charts illustrate the price level of a given product or service at which supply and demand meet. That level is known as the "market-clearing price." Other analytical tools include complex statistical models that consider multiple variables beyond supply and demand, such as seasonal changes (for example, demand for electronics may increase around the holiday shopping season), or fluctuations in monetary factors such as interest rates and inflation.
Economic analysts use statistical analysis to assess the current state of the economy and forecast future conditions in terms of output, inflation, unemployment rates, and other indicators.
Basic economic analysis helps individuals and firms decide how best to allocate their time, labor, and materials to achieve their goals. Governments use basic economic analysis to assess the overall state of their nations’ economies and make policy decisions.
- Microeconomics: Theory and Applications, Edwin Mansfield, 1994