What it is:
Economics is the academic study of the production, distribution, and consumption of goods and services.
How it works (Example):
Economics can be broken down into two main disciplines: macroeconomics and microeconomics. Macroeconomics deals with the behavior of economies on a large scale, usually the economies of countries or regions. Microeconomics, on the other hand, usually addresses individual agents.
There are two main approaches taken by economists: Classical and Keynesian. Classical economics is based on the idea that, in general, market economies can function competently, are able to react to changes in equilibrium, and that governments should adopt a "laissez faire" policy toward the economy.
Keynesian economics, first proposed by the English economist John Maynard Keynes, is predicated on the notion that markets tend to react rather slowly to changes in equilibrium (especially price changes), and that active intervention by governments is often the best way to help an economy recover its equilibrium. In the twentieth century, Keynesian economics has become, by and large, the standard approach to dealing with large scale economies.
Why it Matters:
The study of economics has spawned numerous theories about the nature of human production and consumption including: Marxist theories of production, the Chicago School, which advocates free market and monetarist approaches, and the Austrian School, whose approach is underscored by the emphasis on stock market price mechanisms.