3 Microeconomics Principles To Turn Your Decision Making Astoundingly Good

Great decisions come from great preparation

Photo by Justin Luebke on Unsplash

Six months ago, I did something I’d never done before.

I completed a course on Coursera (*waits for applause*). That too on time, and I stuck with it for eight whole weeks. The course was also on microeconomics, which is a topic far away from my field of study.

I wanted to study microeconomics because it seemed like a cool thing in my head, and it was. I learned a lot of things.

Of all the things I learned, three stuck with me because of their application to multiple aspects of my daily life.

Here is how you can use them in your life as well.

How much are you willing to spend?

Economic Principle: Consumer Surplus

What is consumer surplus?

A consumer surplus happens when the price that consumers pay for a product or service is less than the price they’re willing to pay.

For example,

• You want to buy a TV.
• You decide your budget is Rs. 20000 (or your currency equivalent).
• You go into the store, and you start looking for TVs.
• You have a set of requirements you want your TV to have, like an LED screen, HD display, more than 32 inches, and so on.
• You start browsing the TV catalog, and you stumble upon a TV that meets all your requirements. Its price? Rs. 16000.
• You’re happy, and you immediately buy it.
• Your consumer surplus is 20000–16000, which is Rs. 4000.

You can apply this to time as well.

Let’s say you’re willing to spend 2 hours at a colleague’s place, but the work there took you only 1.5 hours. Your consumer surplus is 30 minutes, which you can use to relax.

Before knowing the actual price for something, make a mental note of how much you’re willing to spend on it. If the actual price is more than that, then you didn’t consider it worth your money to purchase. Move on.

If not, you got a good deal.

What are you saying no to?

Economic Principle: Opportunity Cost

What is opportunity cost?

Opportunity cost represents the potential benefits that a business, an investor, or an individual consumer misses out on when choosing one alternative over another.

In simple words, what it means is each decision you take has a cost associated with it. Most people are blissfully unaware of this cost.

This cost is not necessarily financial. It is all the other decisions you could have taken instead of the one you took.

Some of these decisions could have given rise to beneficial opportunities for you. Hence, the name opportunity cost.

However, finding every possible alternative decision is an impossible task and an impractical one as well. A more realistic and beneficial task is to find the opportunity cost of a decision from the perspective of your immediate goals.

I have four immediate goals;

1. Appear for my grade 2 guitar examination
2. Write and publish 4–5 articles every month
3. Go to the gym 20 out of 30 days a month
4. Work on a personal coding project of mine

After I’m done with work, I hit the gym, come home, eat dinner, write, play guitar, and code. This is my routine.

When presented with an opportunity to do something, I think about all these four things. If I say yes to an opportunity other than my four usual tasks, how will the result of my goals be affected?

Will I have the energy to come back and code? Will I be able to go to the gym today? Will I be able to practice guitar effectively? Will I be in the right mindset to sit, think and write?

That is the cost of that opportunity.

Knowing this, you can confidently decide what you spend your time on. Sometimes, I’m okay with not coding that day. That’s fine.

You just have to be aware of what you’re saying no to.

Do you know what you need?

Economic Concept: Economic Incentives

What are economic incentives?

Economic incentives are financial rewards provided to people to alter consumption and production patterns in an economy.

An example that immediately comes to mind is Tez. For those of you who do not know Tez, you may recognize it by its newer name, Google Pay.

Tez launched in 2017. For the first year of its operations, it had an inviting reward system.

• If you referred a person to join Tez, each of you would get Rs. 50.
• Apart from this, every time you make a payment of Rs. 150 — Rs. 500, you get a chance to win up to Rs. 1000
• Every time you use Tez to pay Rs. 500 and above, you’d have a chance to win up to a lac.

With this incentive in place, people (including me) flocked to this app, and I even won like 1000 rupees once. It made me want to keep using the app to make payments.

This is a positive example of an economic incentive. However, incentives can both work for and against you. When you’re in desperate need of some item or service, and there is an incentive you get by doing it, it’s a win for you.

Companies, however, manipulate you into buying stuff you do not need at all. You’ve all come across these clearance sales banners that say, “Buy 3, get 4 free!” or something like that.

Your mind immediately goes, “Damn! I am getting more than twice the amount of t-shirts for the amount I pay”, but you’re forgetting something. You don’t need 7 T-shirts. You need one. Now you’re left with 7 T-shirts, and you paid for three instead of one.

Therefore, it’s essential to know what you need before going shopping. It’s easy to get carried away by incentives offered by companies.

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Thanks for reading! I’ll catch you guys in the next one!