The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.Friedrich August von Hayek
Have you ever noticed that while bargaining at the flea market, you applied an important economic principle to determine the fair value of the article you desire to purchase? Most probably not because we do not acknowledge the significance of economics in our daily lives. Economics does not always mean big theories, graphs, and Computations. Without realizing, we apply many economic principles in our daily lives during the allocation of resources. We apply economic principles every time we purchase groceries, calculating the fair price of service offered by a freelancer, and of course, during bargaining.
In general terms, Economics is defined as the study of how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs, trying to determine how these groups should organize and coordinate efforts to achieve maximum output. It is a social science concerned with the production, distribution, and consumption of goods and services.
Economics means the allocation of limited or scarce resources (money, time, labor, etc.) in a meaningful way to maximize the return or making a choice to get the desired result by optimum utilization of scarce resources. We all try to maximize the return by smartly allocating the resource at hand. Economics is not only restricted to money, which is a general perception.
We do not acknowledge the contribution of economics in our daily lives in the way we acknowledge the contribution of Science and Mathematics. So, Let’s take a look at the number of economic principles that help us in our daily lives.
We make numerous choices in a single day. Choices are the basis of economic principles, whether money is involved in it or not. Making a Choice means selecting one and rejecting another. Have you ever get confused due to the number of choices available for the same product? If yes, that means before making the final choice you must have considered many aspects. Every individual has different reasons such as Utility, price, quality, and quantity for choosing a particular product or service. Choices, which do not involve money, such as sleeping till late in the morning, or going for the regular morning walk after coming home, late at night, also comes under economics because every decision has an ‘opportunity cost‘ associated with it. We always select the option that is the most suitable for our requirements and could be obtained by the limited resources available for disposal.
Every choice came with an opportunity cost. An ‘opportunity cost’ represents the benefits an individual misses out on choosing one alternative over another. When we make a decision or choice (reject or select), we also accept to bear the profits and losses, attached to the decision. In the last paragraph, we discussed the choice of going for a morning walk or sleeping till late in the morning after coming home late at night. If you choose morning walk, you would lose some hours to sleep, on the other hand, if you choose to sleep till late, you would lose the pleasure of the morning breeze and some health benefits. The sacrifice of the walk is the ‘opportunity cost’ for sleeping till late, and losing the pleasure of your morning walk is the ‘opportunity cost’ for taking some more sleep.
Children know how to use bargaining to satisfy their interests. We all know that small kids are fond of new toys and want a new toy nearly every weekend. It would not be smart on our part if we submit to their demand due to obvious reasons. Kids also know this fact but demand toys until we make a bargain that suits them. To earn a good bargain, children sometimes cry or break the fragile things in the house. To cheer them up and console them, we generally promise to buy a toy every fortnightly or once in a month if they promise to stop crying for the toys. Kids happily accept such a bargain because it assures them a new toy every fortnightly and on the hand, it also lessens the daily agony of the parents. Bargaining is a strategy for determining the fair value price of a commodity in the market. The negotiation to reach a price agreeable to both is bargaining.
Do parents have an option to make kids do, what they want? Yes, and the answer is Incentive.
Parents know how the use of incentives for enhancing the performance of their kids and it works most of the time. In the Old days, parents use to promise to say a bicycle as an incentive to their ‘less interested in studies’ kid if he gets good grades in matriculation. Many times, the offer of incentives made a positive impact on the grades of the student. The incentive coaxes us to enhance our performance. Many of us buy a large number of products during the Christmas sale, because of the discount, a kind of incentive, offered to us. So, the next time when you visit a sale or get an offer from a company, try to ascertain whether it is an incentive or a new marketing gimmick.
Decision making is an inalienable part of our daily lives, so is economics. Knowledge of basic economic concepts could improve your understanding of the market and also the decision making.
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