Many assume economics is a subject best left for government officials and students who love statistics. However, everyone incorporates tenets of this field into their lives on a daily basis: fathers shopping at the grocery store for dinner, teenagers deciding how to spend their summer and a truck driver calculating his route are just a few examples. Economists Charles Wheelan and Burton Malkiel explain in their book, “Naked Economics: Undressing the Dismal Science,” that despite the pervasiveness of economics in everyday life, too few people understand how this field applies to them.
Economics is the study of how people, firms or institutions choose to allocate resources. Resources are not always dollars and cents – time, skill and land are all resources. People make economic decisions with the intention of maximizing their return. For example, a college student might allocate his time and substantial amounts of money to earn a degree. In return, that degree will ideally yield him numerous job opportunities and an increased income.
Some of the most important life decisions are made using economic reasoning. When you choose to have children, whom you marry and where you will live are just a few of these. Before deciding on any of these events, 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.
Economics permeates into everyone’s daily life in the area of purchasing decisions. How much money you have in your bank account dictates what types of purchases you make. Economics groups purchasing choices into three groups: luxury goods, normal goods and inferior goods. Economist.com defines inferior goods as products less desired when income increases. An example is store-brand cereal. As you earn more money, you might purchase name-brand cereal instead. More normal goods, like movie tickets and restaurant outings, are purchased with a rise in income. The purchase of luxury goods like a Ferrari or Porsche also rises once a certain income is achieved.
How much you buy once an item’s price tag changes is also an economic issue. The responsiveness to a change in price is known as elasticity. If you continue to buy a product in the same quantity regardless of a price change, like gas, then it is an inelastic good. On the other hand, if you cease to buy lattes when the price is raised by 50 cents, then coffee is elastic.
Gregory Makiw’s book, “Principles of Economics,” uses a graph to explain how a person allocates her time based on the desire for more goods or leisure. In everyday life, this scenario is demonstrated when she turns down a high-paying job because of the 60-hour work weeks that come with it. Conversely, a person might pick up overtime shifts to earn more money at Christmas.