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Principles of Economics That Relate to Your Daily Life

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When you find yourself in a scrum with a thousand other consumers trying to get the newest smartphone or holiday toy, you are a living example of the economic principle of supply and demand. Basic economic principles can influence everything from lines at the store to the likelihood of getting a raise at your job. Understanding the principles of economics can help you to better understand the world and make informed decisions.

Taxes

When buy something at the store that costs $100, you might end up paying $105 or more when you actually check out. Governments collect money from citizens by imposing fees or taxes on a variety of activities like buying goods, earning income and owning property. Taxes are the reason you take less home in your paycheck than your actual pay rate dictates: employers are required to send some of your pay to the government to pay for income taxes. The government uses tax money to pay for public goods like roads, sewer systems, public schools and national defense.

Inflation

If you went to the movies or purchased a gallon of milk 10 years ago, you’d probably paid less than you’d pay today. Inflation is a basic economic concept that describes the rate at which prices in the economy increase over time. When the prices of entertainment, food, travel and other living essentials goes up, the economy is experiencing inflation. While inflation is often viewed as a bad thing, it can have positive consequences like getting raises at work and bigger tax deductions. Inflation is far more common than deflation – a fall in prices – which usually occurs only in recessions and depressions, when the supply of goods and services outstrips demand.

Supply and Demand

In economics, supply is the amount of stuff producers in the economy make available for sale and demand is the extent to which consumers want to buy those goods. Supply and demand influence all the prices in the economy: abundant resources and products tend to be cheaper, while scarce resources and products are more expensive. Similarly, items that many people want to buy tend to be more expensive than products nobody wants. That’s the reason water is cheaper than gasoline: despite the fact that we need water to live, water is so abundant that it remains relatively inexpensive. A change in demand can change the price – if no one wants wide ties anymore, producers will have to cut prices to get rid of their inventory. A change in the supply situation can also make prices move – that’s why you’d pay dearly for a glass of water in the middle of the Sahara, where the supply of water is nil.

Trade

Trade between nations is an economic principle that has ever-increasing relevance to daily life as digital technology continues to connect people across the globe. International trade allows nations to focus on what they do best and then trade for the things that can’t produce efficiently. For example, the U.S. imports many simple goods from countries like China and India that have cheap labor, while it exports things like aircraft and cars. Countries that export a lot more to the U.S. than they import from the U.S. often wind up owning of lot of U.S. government debt; they have to do something with all the dollars they earn and so buy U.S. Treasury bonds.

Applying economics in everyday life

To get people excited about economics, it’s good to try and think how economics can be applied in everyday life. Some of this is just common sense, but economics can put a theory behind our everyday actions.

Buying goods which give the highest satisfaction for the price

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This is common sense, but in economics, we give it the term of marginal utility theory. The idea is that a rational person will be evaluating how much utility (satisfaction) goods and services give him compared to the price. To maximise your overall welfare, you will consume a quantity of goods where total utility is maximised given your budget. For example, is it worth paying extra charges by airlines, such as paying for more leg-room? Or pay to get priority boarding? Economics suggests we need to evaluate the marginal benefit of these services compared to the marginal cost.

Opportunity Cost

The first lesson of economics is the issue of scarcity and limited resources. If we use our limited budget for buying one type of good (food), there is an opportunity cost – we cannot spend that money on other goods such as entertainment. Opportunity cost is an intrinsic aspect of most economic choices. We may like the idea of lower income tax, but there will be an opportunity cost – in this case, less government revenue to spend on health care and education.

Another example of opportunity cost – no one likes to pay for parking, but would we be better off if parking was free? Most likely not. If parking was free, demand might be greater than supply causing people to waste time driving around looking for a parking spot. Free parking would also encourage people to drive into city centres rather than use less environmentally friendly forms of transport. It would increase congestion; therefore although we would pay less for parking, we would face extra less obvious costs.

Examples of economics in everyday life