Significance of Economics in The Natural Resources Sector

Economics is an important subject in the natural resources sector. It is a social science that studies the production, distribution, and consumption of goods and services, and how individuals, businesses, governments, and nations make choices to allocate scarce resources. The production of food and other agricultural commodities depends on the availability and quality of natural resources, such as land, water, and biodiversity. Economics of agriculture and natural resources can help to address some of the major challenges facing the world today, such as:

How to feed a growing population with limited resources

How to reduce poverty and inequality among rural communities

How to mitigate and adapt to climate change and its effects on agriculture

How to preserve biodiversity and ecosystem services

How to enhance food safety and quality



Economics examines the role of agriculture and natural resources in the economic development and sustainability of society. The following are some significant roles of Economics in the natural resources sector.



First, Economics helps in determining how to allocate natural resources efficiently and effectively. For example, when deciding where to drill for oil, economics can help weigh the benefits of accessing the oil versus the cost of the environmental impact.

Second, Economics provides insights on how natural resources are priced and how their demand and supply dynamics are influenced by market conditions. Market analysis includes the identification of market trends, the examination of market structures and the exploration of market failures that may affect the allocation and utilization of natural resources.

Third, Economics also provides the tools and frameworks to conduct cost-benefit analysis. This type of analysis helps decision-makers assess the trade-offs between conservation and development of natural resources. This sort of analysis gives policymakers and project planners information about the benefits (immediate and long-term) of a proposed project balanced against its potential costs (financial and environmental).

Moreover, Economics helps decision-makers understand the social and economic impacts of environmental degradation, define policies to manage natural resources sustainably, and motivate individuals and firms to make decisions that promote environmental conservation.

Lastly, economics has an essential role in promoting the sustainable use and conservation of natural resources. It does so by incentivizing individuals and firms to develop new ways to use natural resources more efficiently and invest in new technologies that can reduce the environmental impact of natural resource extraction.

In conclusion, Economics helps the natural resource sector to make smart and sustainable decisions about resource use and management.

Differences Between Economic Theory and Economic Model

Economic theory refers to a set of general principles or laws that explain how the economy works. In contrast, an economic model is a simplified representation of a complex economic process or system used to predict or simulate the outcomes of policy decisions or market behavior. Economics theory and economic model are often used interchangeably, but they refer to different concepts. The following are their differences.

Economic theory is broad in scope and provides a framework for understanding how economic agents, institutions, and markets interact. It focuses on explaining the relationship between variables such as price, supply, demand, and market structure, while an economic model is narrow in scope and is designed to help predict specific outcomes, such as the effect of a particular policy intervention on the economy.


Economic theory is not very good at making precise predictions about the future behavior of the economy, while an economic model is designed to make specific predictions about the future behavior of the economy under certain conditions.

Economic theories are difficult to test empirically and are often based on assumptions that may not hold true in the real world, while an economic model can be tested empirically against real-world data, and its results can be used to refine or reject the model over time.

Some Economic Theories

There are many examples of economic theories that cover different aspects of economic phenomena, such as production, consumption, exchange, distribution, growth and development. Some of the most applied economic theories are:

Supply and demand theory: This theory explains how the price and quantity of a goods or services are determined by the interaction of buyers and sellers in a market.

Monetarism: a school of thought that focuses on the role of money supply and central banking in influencing inflation and economic activity. Monetarists believe that inflation is always a monetary phenomenon, and that the government should follow a rule-based policy to control the growth of money supply.

Classical economics: a school of thought that emphasizes the role of free markets, competition and individual self-interest in achieving economic efficiency and growth.

Keynesian economics: a school of thought that stresses the importance of aggregate demand, or total spending, in influencing economic output and employment. Keynesian economists advocate for active government intervention to stabilize the economy during recessions and depressions.

Neoclassical economics: a modern extension of classical economics that incorporates marginal analysis, utility theory and rational choice theory. Neoclassical economists assume that individuals and firms maximize their utility and profits respectively, subject to constraints.

Marxian economics: a school of thought that criticizes capitalism and its exploitation of workers. Marxian economists analyze the historical development of economic systems, the class struggle between capitalists and workers, and the role of ideology and culture in shaping economic relations.

Institutional economics: a school of thought that emphasizes the role of institutions, such as laws, norms, customs and organizations, in shaping economic behavior and outcomes. Institutional economists study how institutions evolve over time and how they affect economic performance and distribution.

Behavioral economics: a branch of economics that incorporates insights from psychology, sociology and neuroscience to explain how people make decisions that deviate from the standard assumptions of rationality and self-interest. Behavioral economists study how cognitive biases, emotions, social preferences and other factors affect economic choices and outcomes.