Economics in Everyday Life
(And why you should care)
One must wonder about the use of these countless subjects which we learn in our everyday life. Science has a simple answer to that when it comes to its own subjects, Physics is simply there to understand the universe and all the mechanics and mobility, Chemistry teaches us about the elements and the basic building blocks of life, Biology doesn’t need an introduction and last but not the least, Math teaches us literally everything from adding numbers to teaching our children, from complex statistics to means to stop world wars. One subject that slips all our minds from time to time is Economics; although we are not completely at blame considering how little we think it affects our daily lives.
Almost anyone who has ever been to college knows the importance of managing money. This management is something that we have derived from economics. Speaking from experience, the study of economics is nothing more than the study of management. Combine study of management with study of money and voila, you have economics.
Let me try explaining this using an analogy. Assume that you are a 19-year-old and back in university, you have about Rs 500 in your account which you have already withdrawn and need for it to last 7 more days till the month ends and more money comes into your account. That’s when you realize the need for management of money, you try to chart out a method as to where you can spend your money and when. That’s when your brain starts accounting and maintaining a ledger in your brain of all your spending each week and how you can cut out on that so as to last another week before money comes into your account (A common phenomenon known as “month end” is a much more complex economic benefit). We tend to continuously make decisions and calculations to help us survive a few more days and in turn use economics for our benefit, without even being aware of it.
Let us now fast forward into the future when you are 32 years old and already have a job where you work 9 hours a day, 5 days a week which is about 45 hours of work. To be honest that does not sound that bad but what if you found out that you could get a better paying job that required you to work 60 hours a week. That is when your brain starts analyzing the potential pay hike, the downside being you get lesser time to spend with your family; and that is when the concept of social economics comes into picture.
Now all this is fine but we all knew budgeting came under economics. Let us now think about something more: how does this affect us?
Opportunity Cost
We make choices everyday in our life, choices ranging from what to buy and what to eat to choices that decide what we want to do in the future. Each choice that we make takes an economic toll on us or reaps a reward — depending on said choice of course and .
Let us consider three scenarios: -
1. Working at a restaurant on minimum wages of about Rs 15000 a month.
2. Studying and going to a good college to earn a degree.
3. Spending most of your time engaging in leisure activities such as playing games or sleeping.
Each one of theses scenarios has a positive or a negative effect on our lives and in turn on our economic growth.
If we choose the first scenario it’s going to hinder our education thus leading to us getting lower grades which could have an adverse effect on the future.
If we choose to follow the second scenario, we would not have enough time to spend on leisure activities, neither would we have enough money to spend during our time in college but once we pass out of college, would better our chances of getting a high paying job would allow us to be more economically stable.
The third and the last option does not need to be explained as it has the most negative effect on our lives.
Behavioral Economics and Bias
When making decisions we don’t tend to first look at leading economic indicators. The perceptions about the economic outlook can influence certain decisions. For example, those aware of the current economic situation may be aware of the depth of recession which makes a period of low-interest rates more likely. This suggests that if you could get a mortgage, mortgage payments would be cheaper, but, savings would give a poor return.
However, the bad state of the economy and high unemployment rate is a factor that may encourage students to stay on and study. Since youth unemployment is currently very high, it makes more sense to spend four years getting a degree rather than going straight on to the job market.
In traditional economics, it is assumed individuals are rational and utility maximizing. In other words, it is assumed we make decisions that help in maximizing our economic welfare — spending money only on those goods which give us satisfaction. However, behavioral economists note that we are often influenced by irrational and non-utility maximizing influences. For example, companies which ‘nudge‘ us to make decisions infact harm our welfare — e.g. super-sized portions, we don’t really need but cause us to become less healthy.
The importance of the insights behavioral economics gives us is that we can become aware of factors that may cause us to make sub-optimal decisions. We can try to resist commercial nudges — nudges that convince us to consume goods which don’t really benefit us.
In conclusion Economics as a subject might be boring and a waste of time but looking at its benefits to our own lives teaches us that it is not only important but essential to the average joe.
