Applying Economics in Everyday Life

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Applying Economics in Everyday Life

At the start of the academic year, I always feel a little pressure to justify the study of economics. Students come up asking things like, should they do Economics or History? It’s hard to know what to say, but 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. 1. Buying goods which give highest satisfaction for the price. This is  common sense, but in economics we give it the fancy 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, suppose you have £10 left over at the end of the week. With that £10 you could buy my Economics Revision Guidefor £7.99 and still have change for a Cheese sandwich or you could waste that £10 on a piece of Sushi from an expensive Japanese restaurant. The Sushi will give 5 minutes enjoyment, but my Revision Guide will *guarantee* you a top grade and change your life. So the theory of marginal utility states every student should buy my Revision Guide… (or something like that) 2. Be Wary of Clever Marketing. To maximise our total welfare, we have to be aware some firms may have a vested interest in encouraging us to buy something we don’t really need. To maximise your welfare, you have to be able to distinguish your real satisfaction as opposed to false satisfaction from clever marketing. 3. Budget Constraints. The first lesson of economics is the issue of scarcity. We may have unlimited desires, but resources are limited. We need to use our budget / resources carefully. We can only spend the money we have. 4. Life Cycle Hypothesis – On the one hand we have to be aware of our budget constraint,...
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