The term economics refers to a science of making logical decisions regarding the use of scarce resources, so as to satisfy the most compelling of unlimited wants. It is many times juxtaposed with the term finance. Finance is defined as the study and management of funds for the purpose of wealth maximization.
While economics studies how people, maximize gains from limited resources, i.e. select the best alternative with the objective of maximizing the level of satisfaction. Conversely, finance is the spine of the business, without which it is impossible for the firms to survive and grow in the long run.
Although finance is nothing but a subfield of economics. Many people often assume them as one and the same thing, which is not true. And so, here we are presenting you the article which will simplify the difference between the two subjects.
Contents: Economics Vs. Finance
|Basis for Comparison||Finance||Economics|
|Meaning||Finance refers to that branch of economics which is concerned with the procurement, management and utilization of funds in an effective manner.||Economics is the science which studies the behavior of human beings, as a link between ends (wants) and limited means (resources) to fulfill them, having alternative uses.|
|What is it?||An offshoot of Economics that deals with arrangement and administration of money.||Branch of knowledge that deals with production, consumption, distribution and exchange of commodities for money.|
|Based on||Time value of money||Money value of time|
|Concerned with||Optimization of funds to increase wealth.||Decision making regarding the way resources are to be used, to attain maximum satisfaction.|
|Determines||How the funds are actively and optimally managed and utilized?||How humans make decisions, when there is scarcity of resources?|
|Aim||Maximization of Wealth.||Optimization of scarce resources.|
|Explains||Reasons for trade surplus and deficit, affecting the economy as a whole.||Reasons for fluctuation in the rate of interest, inflow and outflow of cash, etc.|
Definition of Economics
Economics refers to a branch of knowledge which analyses the way in which a person or economy, makes choices with or without the use of funds, to utilize the productive resources that are limited in quantity and have multiple uses with an aim of producing goods and services over time and distributing the same for consumption, both at present and in future among many consumers in the society such that there is an optimal utilization.
In finer terms, Economics deals with the production, distribution, consumption of goods or services, transfer of wealth and all the other factors which affect them. It studies how limited productive resources are allocated to different uses in a nation. As well as it assesses the processes through which the productive capacity of such resources can be increased. Further, it also looks after the factors which resulted in acute fluctuation in the rate of employing these resources.
It aims at analyzing, how the economies function and how the agents (people) interact within the market and make decisions. It develops a scientific approach that facilitates in understanding, analysing and resolving an array of economic problems with the help of different measures, models and frameworks, to deal with them, which are applicable in different situations.
Definition of Finance
Finance is often regarded as “The science of money”. It is an activity related to the planning, sourcing, procuring, utilizing, managing and controlling the funds of the business or any other entity. Basically, it aims at transforming the saved or collected funds into productive uses, so as to make more money out of it.
Finance is the study of optimum allocation of assets i.e. the investments made by the organization or individuals so that it will bring the highest possible returns over time.
Finance is all about funds management, i.e. circulation money, availing and granting credit, capital market activities, investing and banking activities. It stresses on the money flows, fluctuations in the interest rates, rise/ fall in the prices, variations in markets, etc. and revolves around three things i.e. money, time and risk involved.
When finance is applied in business, it is called as business finance, which is nothing, but the arrangement and management of cash and credit, so that the firm has resources to attain its long term goals and objectives. Finance is the lifeblood of business without which no entity can survive in the long run.
Key Differences Between Economics and Finance:
The major differences between economics and finance are given as under:
- Economics is a social science which studies the behaviour of people regarding the use of scarce resources to satisfy their infinite wants, to attain satisfaction. As against, Finance is a science that studies the procurement, management and utilization of funds (lending, saving, spending, investment, etc.).
- Finance is nothing but a sub-field of economics, whose subject area is administration and arrangement of money so that it provides the highest returns on its investment. In contrast, economics is a branch of knowledge which is related to the production, consumption, distribution and exchange of goods and services.
- Economics mainly aims at focusing on the money value of time, i.e. the sum of money; a person can spend to buy ‘time’, whereas Finance concentrates on the time value of money, i.e. a rupee today is more valuable than a rupee one-year later.
- Economics stresses on the decision regarding the way one should use the resources to attain the highest level of satisfaction. On the contrary, finance is concerned with the way funds are to be optimized to increase wealth.
- In economics, we discuss how human beings make decisions when resources are scarce. Conversely, in finance, we discuss, how to actively and effectively manage and utilize the funds of the business.
- Economics aims at optimization of resources which are limited in nature, whereas Finance aims at maximization of wealth.
- Economics explains the factors behind the trade surplus or deficit of the goods and services, which affects the whole society. Conversely, finance explains the reasons behind the fluctuation of interest rates, variations in prices of any commodity, inflow, and outflow of cash, etc.
Branches of Economics
Microeconomics is that branch of economics, which is mainly concerned with the individual units such as a consumer, a firm, industry, household, etc. It analyses the demand and supply of goods in a particular market segment along with the prices of related goods and substitutes.
Macroeconomics is that subpart of economics, which focuses on the study of aggregate variables, such as aggregate demand, aggregate supply, total investment, total consumption, total savings, etc. It deals with those issues which affect the whole economy like unemployment, poverty, general price level, national income, etc.
Branches of Finance
- Personal Finance
Personal Finance is related to the income and expenditure of an individual or household, wherein the savings, investments and the amount spent by them as expenses are taken into consideration.
- Public Finance
Public Finance is concerned with the activities of the government in the economy i.e. government revenue from various sources like taxes, penalties, fees, duties, etc. and its expenditure on the development of roads, airports, education, sewage and many other developmental activities.
- Business Finance
Business Finance is all about making decisions concerning the investments to be made by the concern and identifying the best sources to finance those investments. It deals with planning, sourcing, acquiring, managing, and controlling the funds used in business.
- Corporate Finance
Corporate finance deals with the capital budgeting, cash management, credit management, financial forecasting, investment analysis, acquisition of funds of the business enterprise, so as to maximize the wealth of the concern.
Both the terms Economics and Finance has its relevance in resolving the various issues of the economy, such as economics is needed to solve the problems of unemployment, poverty and the allocation of scarce resources, and when we talk about the higher returns on the investment, that’s where finance comes into the picture.