Economics is universal and surrounds our daily life, in practise it can be used to answer a wide range of questions that arise from daily life. No, this introduction isn’t a response to a University Interview question asking what economics is, but instead is an introduction to a new feature we are introducing – Everyday Economics.
This feature aims to answer a variety of different puzzles that can be found in daily life and answered by economic theory.
When confronted with a reality puzzle there are a number of economic tools we can use to try and solve the question. Some of these tools (of which you can learn more of the theory on, in our Lessons Page) are listed below, in no particular order:
1. Opportunity Cost – what is the cost of doing something in terms of the difference between what they do and what they would have done. For example you may wonder why people don’t stay in restaurants and café’s all day once they have paid for a meal, seeing as the price of ‘eating in’ is included in the meal. Apart from risking being kicked out by the management, another potential reason is because whilst they are sitting in the restaurant they could be doing something else. They could go and work and earn some more money (thus there will be a high opportunity cost), or pursue another leisure activity. Therefore there is an opportunity cost to sitting in a restaurant and this could be used to explain why people don’t lounge in a restaurant all day.
2. Incentives – when confronted with a question its important to explore who seems to gain from something and who might loose. In economics, profit is considered the greatest motive of all, and therefore if someone gains to profit then they have an incentive to take action. There are also other important motives such as love and prestige which influence people’s decisions. An example of this is that some people turn up to work at 8.30 even though they don’t start until 9. Their motive for doing this may be because they want to impress their boss and the incentive is prestige or the possibility of a promotion (which generally means higher future earnings, showing how important and valid the profit motive is). If this theory is correct, then workers will only arrive in early if their bosses are also there to commend them on this. If no one can see that an employee has made an extra effort or worked harder then (s)he isn’t likely to be rewarded, and therefore is unlikely to make this extra effort (this can be tied in with OC and cost-benefit – the cost of him/her doing something may be greater than the potential rewards/benefit and thus may not be done).
3. Cost-Benefit – when making a decision to take action rational beings analyse the costs and the benefits of taking the action and then evaluate whether or not to proceed. During this analysis all types of costs are included, and not just the financial ones. These can include opportunity cost, physical, emotional and mental costs as well as financial costs.
4. Supply and Demand – supply and demand is considered one of the most fundamental theories of economics and can be considered as its foundation. Therefore when looking around the world a lot of questions can simply be answered with this basic concept. Therefore if you were wondering why the price of diamonds is so high it is because supply is low and at the same time demand is high, thus pushing up prices. The theory of demand and supply can be utilised to answer much more complex questions than this, so don’t underestimate its capability and ignore it in your analysis!
5. Elasticities – can be used in conjunction with the theory of demand and supply to answer complex questions such as why people might spend so much on a good. If you aren’t familiar with elasticities read up on it here.
If you have any questions you wish to pose (there’s no guarantee I’ll be able to answer them, but they can always be put out there!) then please leave a comment on the blog, the forum or view or Contact Us page.
When answering posed questions I may come up with a different response than to yourself. If this is the case then please leave a comment with your suggestions and ideas.
Stay posted for more updates and accompanying posts!