Tools of Economics

by John London; Updated September 26, 2017
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Economics is a social science that studies how to create wealth and spread material well-being. Macroeconomics is one of the many branches of economics that study gross domestic product (GDP), inflation and other macro variables. Microeconomics study how firms and households behave, international economics and political economy. Still, there are tools that are widely used across all branches of economics. They can be broadly defined as economic, mathematical and statistical.

Economic Tools

Economic tools refer to qualitative instruments available to economists. The law of supply and demand is the primary example of an economic tool. Supply refers to goods that are available in a market, whereas demand defines the amount of products or services consumers want to buy. The price of a product drops if the supply rises and the demand is stagnant. Conversely, the price of the product goes up if demand rises while the supply remains the same.

Mathematical Tools

Mathematics comes hand in hand with economics. Math helps economists solve concrete problems involving numbers, such as how to calculate the profit margin of a firm, what price a company should set to maximize profits, or how to calculate the amount of CO2 emissions in the atmosphere. Mathematical tools used in economics include matrix algebra, linear equations, econometric models, optimization and differential equations.

Statistics

Statistics is similar to mathematics, but here the emphasis is made on processing vast arrays of data. Statistics, for example, help economists calculate a nation's GDP or allows them to better configure a manufacturing process to reduce costs. Statistical tools include regression and correlation analysis and calculation of probabilities.

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