Economics in Everyday Life

There are many misconceptions about the definition of economics. Many people hear the word ‘economics’ and assume that it’s all about money. Economics is not all about money; it is about the choices we make as human beings. It focuses on why we make the choices we do in terms of cause/effect and benefit/cost. Some of these decisions involve money, but most do not. Most of your daily decisions have nothing to do with money, yet they are still considered a subject of economics. For example, what are the advantages and disadvantages of studying at university versus starting a job now? Should I buy that pair of shoes? What’s the best route to work? There is no one correct answer to these questions. Every person has their own set of principles and beliefs that they follow, and as such, the economic choices we make – as well as their value – are highly subjective. The following essay will explore the definition of economics through my experience as an economics student, and how economic theories apply to everyday life.

One of the more famous and widely accepted definitions of economics comes from Lionel Robbins, who defines it as:

“the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

In other words, economics is a way of understanding people’s behaviour in an attempt to fulfil wants and needs. Our resources are limited – or scarce as Robbins puts it. But our needs and wants are unlimited. So herein lies the problem; how do we fulfil our unlimited wants and needs with scarce resources? People must weigh up choices and their alternatives, all of which will have consequences. In a perfect world, we would have unlimited resources and everyone would have what they desire. But we don't live in a perfect world, and consequently not all wants can be fulfilled. Therefore, wants and needs must be prioritised and decisions made about the allocation of resources. As we acquire a greater understanding of economics, we can make more informed decisions about the allocation of resources.

There is no such thing as ‘a free lunch’. We generally must give something up in order to attain what we want. The relevant cost in economic decision-making is referred to as the ‘opportunity cost’. Opportunity cost is the value of the next best alternative you give up. This value is unique to each individual. There doesn’t always have to be a monetary value attached to the cost; it can be anything of value to the person such as time or effort. For example, it’s exam time and your friend invites you to go to a party. You know you need to study for your last exam, but you don’t want to miss out on a fantastic party. A rational person would determine that the cost of losing study time and sleep is greater than the benefit of having fun with your friends at a party. You’re almost finished and you can party as much as you like once exams are finished, therefore you decide to stay in and study.

In economics, decisions are characterised by marginal cost and marginal benefit. When a slight change has been made to a plan, a rational person will compare the costs and benefits of this change. If the marginal benefit of an action is considered to outweigh the marginal cost, then that action will proceed. For example, should I purchase the ice cream that’s on sale, even though it doesn’t taste as good as the more expensive brand? If I go with the cheaper brand I can afford to go to the movies later this week. In my opinion, the benefit is greater than the cost and therefore I decide to sacrifice the taste of ice cream in order to see a movie with friends. However another person might decide that the more expensive ice cream is worth the money. This shows that the value of an economic decision is unique to the person, and as such, is determined by their needs, wants, time and resources.

There are two main categories of economics: microeconomics and macroeconomics. Microeconomics studies the economic decisions of individuals, households and businesses that make up the greater economy. Of particular interest is how people respond to changes in price, and why they demand what they do at a particular price point. This is also known as the law of supply and demand.