The classic paper “Software Engineering Economics,” Barry Boehm, IEEE Transactions on Software Engineering, Vol SE-10(1), 1984, pp. 4-21. opens with a dictionary definition of economics as a social science concerned chiefly with description and analysis of the production distribution, and consumption of goods and services.
A broader definition is
Economics is the study of how people make decisions in resource-limited situations. And those decisions are made in the presence of uncertainty.
Macroecon is about how people make decisions on a global scale. Microecon is about how people make decisions on a personal scale. This is about decisions for individuals and organizations. For software development, there are many decisions to be made. What Feature to develop next? Are we ready for the Release? Do we have enough time and money to develop the needed Features before the business needs to put those Features to work earned back their investment?
Since there are always limited resources - these are time, money, and people - we need some ability to make decisions in the presence of these limited resources. As well there is uncertainty on every project. Reducible uncertainty (Epistemic) and Irreducible (Aleatory). Reducible uncertainty can be reduced. Irreducible can not. We can spend money to reduce Epistemic uncertainty. Only margin can reduce irreducible uncertainty.
One model that is many times misunderstood by the agile community is the Cone of Uncertainty surrounding estimates as well as the technical and operational aspects of the project.
If your project's uncertainties are not being reduced in some declining manner - predefined manner - then you're going to be late and over budget and your deliverables are unlikely to work. So when those uncertainties are outside the upper and lower bounds of the Cone of Uncertainty, you'd better start looking for ways to fix the project.
So if we're going to be making decisions in the presence of uncertainty - somewhere along the horizontal axis of the project - with the resulting uncertainty range, we're going to need to estimate not only what the range should be for the phase of the project, but what effort and duration will be needed to reduce the variance of that uncertainty to keep that range inside the cone.
