Economics | Pervasive | 20th February 2022 | Virtual Wire
We usually see economics as a subject taught in colleges/school or a tool used by economists and researchers to assist them in their respective fields, but we unknowingly encounter and use it every day during our chores like shopping at the grocery store, truck driver calculating his route, choosing between lays and uncle chips and the list goes on.
Before proceeding, let’s give a small introduction to economics for those who aren’t having knowledge of it yet which is completely okay because after reading this article, you’ll definitely be a better thinker. Collins English Dictionary defines economics as: “The study of the way in which money, industry, and trade are organized in society.” It involves the allocation of resources across firms, households and government. And one point to be noted is that people, in general, look to maximize their returns in any given scenario. Economists Charles Wheelan and Burton Malkiel explain in their book, “Naked Economics: Undressing the Dismal Science,” that despite the pervasiveness of economics around us, very few are able to connect the dots. So now let’s dive deep into some case studies and observe the relevance of economics in our daily lives:
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Where do you choose to live? how many children you choose to have is one of the decisions every person takes at some moment in his/her life. Before deciding, a person performs what economists call a “cost-benefit analysis.” Simply put, the pros are weighed against the cons. If one choice provides more utility or personal satisfaction than another choice, a decision is made. As an example, before planning for a second baby, you have to work on the budget and conclude whether you would be able to meet the expenses like school expenses, food, clothes etc. for that baby or not.
People spend more than half of their lives working and hence, there is no chance that we can’t find and observe economics here. Which job will give the most satisfaction/salary? Which company has better future opportunities? You choose to allocate your precious time and energy to a company/organization that you think is a great place for you to be. And sometimes it is not just about finding a well-paid job; we tend to gain most job satisfaction when we feel part of the process and a degree of responsibility and influence. It all comes under the tree of economics.
Finding the best dress at a cheaper price is a niche for many😊 and guess what, you were already playing a great economist. Genius! Economics involves weighing different options to find the most optimum one that reaps maximum benefit for the customer. And that shopping example is an all-time classic example. How much you buy once an item’s price tag changes is also an economic issue.
In the present scenario, India is experiencing a boom in the culture of investing, may it be cryptocurrencies or stocks. Every other Gen-Z is having his/her Demat account and is constantly acquiring knowledge on it which is a great sign to make India a progressive country. But what can economics teach us? One cautionary tale is that of irrational exuberance which in simple language refers to the overvaluation of assets without any logical backing. Investors develop overconfidence about the valuation of assets and the idea of a possible recession never strikes them. And did you know that it was the reason behind the infamous financial crisis of 2008?
Here, economics teaches you to the concept of opportunity cost which means the cost of an alternative forgone. When one chooses to put more emphasis on the valuation of assets and throw big money to purchase assets, hoping it would reap high returns; the falling value of a currency becomes the opportunity cost. A currency loses its value in the long term! So, considering opportunity costs can help us make better decisions. If we act on instinct, we may choose the most pleasurable or easiest course of action (which indeed happened in the 2008 crisis), but the best decision in the short term may not be best in long term.