Economics 101: It’s Not What You Think it is

For those of you who came from public schools, myself included, basic economics is poorly understood and taught ineffectively. Yet you and I use economics just about everyday.

When economics is mentioned most people might think it’s about money or Wall Street, but it’s more than that; economics is a social science like anthropology, political science, psychology and so forth. It’s the study of the exchange of goods, services, and decisions between individuals and groups, like government or businesses.

The most important component of economics is scarcity, an imbalance between what we want and need versus what we currently have. This imbalance has existed from the time we are born, thus it’s natural to seek what we don’t have. Scarcity will always exist no matter how much or little we have. Take Bill Gates for example. When his net worth reached $1 billion did he stop going to work? No, because he was dissatisfied with some other aspect of his career that he felt he lacked, such as competing with Apple for innovative technology.

Now that you have a basic understanding of scarcity let’s apply it to a real world problem like terrorism. Despite what many Americans think, terrorists have similar thought processes like the rest of us. The number of “Western infidels” that terrorists want dead versus the number that are still alive presents a problem, and the imbalance of resources needed to kill as many Americans and Europeans as possible is also scarce. The same could be said for our government trying to rid the world of terrorism. However, neither side will win because remember, scarcity is a problem that will always exist.

Another important aspect of economics is making decisions for every aspect of our lives. Have you ever wondered why you’re constantly making bad decisions? Would you like to learn how some people seem to have everything right? There’s a simple principle to live by that I learned from a wise, old sage who taught me the cost-benefits analysis. We already know about making a list of pros and cons when it comes to decision making, but what many people leave out is opportunity cost, or the next best alternative. Opportunity cost is like having to forgo a resource, or in other words a tradeoff. For example, I’m deciding whether or not to go out with friends.

Benefits:

• Catching up with friends I haven’t met in years

• Having a good time

• Feeling less lonely

Direct Costs:

• Probability of being left out and ignored

• I’ll have a terrible hangover the next day

• I have work to do

• Wasting time

• Feeling sluggish and tired

Opportunity Cost:

• I could’ve used money spent on drinks to pay rent

After doing a cost-benefits analysis I’ve decided to not go out with friends because the costs outweighs the benefits, therefore I’ve made a rational decision. This brings me to the last part of good decision-making; rational and irrational decisions, and the main reason why irrational decisions are made is because of emotions. You must cast aside emotions and think with your head. This principle applies to long-term relationships as well. People don’t give much thought, other than falling in love, when entering a relationship. Before you commit yourself to someone, first clear your head of love and passion, then start making a cost-benefits analysis. Ask yourself this: Does he/she share the same values like religion, politics, raising kids, money, etc. as me? Is he/she the type to party all night while I prefer to curl up with a book? Are we opposites? Basically, try to find a person who is similar to you as possible, because while opposites do attract their differences will cause many arguments and heartbreaks.

To help you better visualize good decision-making, commit to memory this:

• Benefits ≥ Direct Cost + Opportunity Cost = Rational Behavior

• Benefits < Direct Cost + Opportunity Cost = Irrational Behavior