Why you should learn basic economics
There’s always something that you need to know. Economics is something you should want to know. It’s pervasive. It’s powerful. It’s involved in everything we do. Our jobs, our households, our shopping, and the decisions we make are nearly always a facet of some economic conundrum. Understanding the basics of economics can truly enrich your life, open your eyes and help you make better decisions, both big and small.
Our lives are a series of market places, and the events unfolding around us are often related to economic outcomes. Believe it or not but a most of us intuitively understand economics. A cost benefit analysis is really just a way we weigh up our options. Is it a night for “Netflix and chill”, to do some extra emails for work or to go out on the town. When we are trying to choose, we are weighing up the costs to us and figuring out the ideal allocation of our time for Saturday night.
I was lucky, I won the birth lottery and was blessed with a great family. I grew up in the country on a small farm and my father taught economics at a secondary and tertiary level. It took an hour and half to drive into the big-smoke, Melbourne. I remember sitting in the car with Dad and being introduced to economics without even realising it. We’d talk about the cars around us. What manufacturer owned which brands, where they were made and how they got here. We hypothesised on where the person might be going and what they were up to as we shared the roads. I learnt so much just driving into the city and I want to share that with you. I want to share a perspective so you can benefit from a certain way of thinking.
- Economic way of thinking
Economics is about being logical, rational in the way you approach a situation. When it comes to making a big decision whether that be a new job, relationship, or an expensive new pair of shoes; I’ve found economics has helped. Everyone says to do a pros and cons list which is a simple cost benefit analysis but really 9 times out of 10 we just need to take a breath and be logical. Emotions often get the better of us, and behavioural heuristics can be tricky but try embracing the economic way of thinking. Ask yourself: is this a good use of my resources? does this make sense? what are the flow on effects?
Simply slow down and think logically. If you do this then you must be giving up that and are you prepared to do that. Is there a reason that this person is selling at a discount? Think rationally.
- Supply and Demand
Economists are in love with supply and demand. Those great graphs with lines going up and down, making an X to mark the spot. Truth is, everything really does come down to supply and demand. Specials at the supermarket, sale items in mall, the price of gas/fuel at the pump, all aspects of supply and demand. When investing in financial products like shares the phrase goes “buy low, sell high”. This is pure supply and demand. When other people don’t want a product the price will fall and when everyone else wants/needs it then the price goes up. We are all competing for the same resources, the same goods, the same services. I prefer to shop out of season. So when winter items are hitting the shelves, I try and buy my summer clothes. Those summer items are on sale as no body else wants them. The same rules apply with the new car and the petrol to fuel it. Thinking of whether you are in the herd or the outside can make a big difference to your bank account. Thinking of supply and demand now and in the future can change how you vote, how you behave and how you shop.
- Cost Benefit Analysis
The cost benefit analysis is pragmatic and a great easy tool. In a cost benefit analysis you are looking at how much this will cost you and how much will it benefit you. The net benefit is where you make your decision. This is a fancy version of a pros and cons list. Figure out costs like time, money, other activities or items you won’t be able to do, opportunities in the future, cost/benefit to others, and whatever else is applicable. Is buying a cup of coffee on the way to work everyday worth the $900+ you’ll spend each year? Not to mention the future costs of dealing with the waste of disposable cups and lost time standing there waiting to order and then waiting for your coffee to be made. Figure out the costs, apply logic, and look at the time in the market, the functions of supply and demand, then assess whether the benefit is great enough for you to do whatever it was you were thinking of doing.
These 3 actions have made me money on the stock market, have saved me money in shopping and have meant I have spent my time wisely. I buy high quality items that will last and I buy them out of season. Using my money as efficiently as possible as that money costs me time to get and I don’t want to waste my time. Economics encourages to look beyond our own bubble and I believe that is important. I hope that these tools help you help yourself. Everyone deserves to have the opportunity to create their own wealth and create a life of meaning for them. Economics is designed to help us as individuals and as a society, community, nation and world to make better decisions.
Time, energy, money, relationships, happiness, knowledge are all factors of the economic equation.
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