Most people wonder about the real-life applications of the numerous subjects we learn every day. Some subjects are simple to see their value. For example, we see physics in action through mechanics and mobility, chemistry through elements and the building blocks of materials, and Biology through medical practices. What of Economics? What are the applications of economics in real-life? This article will explore the simple ways that we interact with economics in or everyday activities.
Importance of Economics from an individual perspective
Economics dictates almost all the choices we make about the items we buy, how we utilize or consume them, the work we choose to do, and how much money we spend, and save from our earnings. The following is a summary of the principles of economics in play when we make these individual decisions.
1. Opportunity cost
Opportunity cost is what benefits a people or a business’s miss out on when they choose one alternative over the other. For example, if you have to choose between going to college for four years or to work and earn a salary during that time. If you decide to go to school, then you miss out on the pay, and you will not have any money for expenses and leisure activities. If you choose to forgo school and to take the job, then you miss out on an education that could have landed you a better job in the future. Therefore, the decision you make will be the one with the least opportunity cost and with the most foreseeable benefits from your perspective. The principle opportunity cost applies to all choices you make in your day to day activities.
2. Nudge and rational behavior
This principle of Economics is used by businesses to influence consumer purchase by offering non-utility value, supersized portions of their products. Economists assume that people make purchases according to the level of satisfaction they will get from the product. Therefore, you may go to a store to buy a bottle of soda; however, the ‘buy two get one free’ tag on the counter will convince you otherwise.
Application of macroeconomics in daily life
Many small decisions we make every day may not consider the leading economic indicators, but it does not mean they are not affected by them. When you look at it from a broader perspective, macroeconomic factors like inflation and recession affect taxation and the price of commodities. Therefore, they affect the supply and demand of the products. Factors like a lousy state of the economy may also influence parents’ decision to take their children to school. Here are some of the applications of macroeconomics in real-life.
The amount of tax the government imposes on its citizens determines the net salary and the disposable income they have. The tax on goods and services of a country determine their cost. Therefore, tax is the ultimate determinant of whether you will have the purchasing power to buy something or not.
2. Interest rates and Inflation
The inflation state and rate of a country determines the value of its people’s assets and investments. With high rates of inflation, people cannot save in ordinary accounts, and they can only opt for bonds that may give an interest rate almost similar to the inflation rate to secure their savings. However, high-interest rates have their disadvantage too. Individuals with overextended credit and long duration loans like mortgages will have to pay a higher amount of money back to their lenders. Therefore, the macroeconomic status of a country is critical in the investment choices of its people.