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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 help put a theory behind our everyday actions.

Buying goods which give the highest satisfaction for the price

toblerone bigger gap

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. See: Extra charges by airlines

Sunk cost fallacy

A sunk cost is an irretrievable cost, something we cannot get back. For example, suppose we sign up for a gym membership at $40 a month for a whole year. We are committed to paying $480, whether we go or not. If we are feeling unwell, should we go to the gym to get our money’s worth or should we write off the sunk cost and maximise our marginal utility for that particular day? See: sunk cost fallacy

Opportunity Cost

how can applied economics solve real world problems essay

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.

There’s no such thing as free parking

waiting-narrow-road-parked-cars

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 more environmentally friendly forms of transport. The result would be that free parking would increase congestion; therefore although we would pay less for parking, we would face other indirect costs. (time wasted)

Behavioural economics and bias

Traditional economic theory assumes that man is rational. However, the work of behavioural economics suggests we can be prone to bias and irrational behaviour. For example, we may be prone to a present bias where we overvalue pleasure in the short-term and ignore long-term implications. For example, consuming demerit goods like alcohol or not saving sufficiently for retirement. The insight of present bias suggests we make decisions our future self would not make. If we become aware of these bias and irrational behaviour, then we can make better decisions which improve our long-term welfare.

See: Behavioural economics

Irrational exuberance

Another issue in behavioural economics is that of irrational exuberance or when we get carried away by an asset bubble. Can we be sure we will not get carried away by a boom and bubble? History suggests that many investors are over-optimistic about their ability to leave the market at the optimal time and can feel that this time is different.

See: Irrational exuberance

On the other hand

In economics, there’s always another way of looking at the world. Borrowing is bad, except when it isn’t. Nothing is black and white in economics; it depends. For example, government borrowing to finance pensions for an ageing population can lead to an unsustainable rise in government debt. However, government borrowing during a recession can help the economy recover.

Diminishing returns

If we like chocolate cake, why do we not eat three per day? The reason is diminishing returns. The first chocolate cake may give us 10/10. The second cake 3/10. The third cake may make us sick and give a negative utility. People may have different opinions about when diminishing returns set in. Some students may feel this is after the second pint, other students only after considerably more. There are also diminishing returns to money. That is why we don’t spend all our time working –  extra money gives increasingly less satisfaction and reduces leisure time

DIminishing returns to wealth/income

utlity-function-risk-aversion

A similar concept is that of diminishing returns to wealth and income. Does an extra $100 give us more utility? Yes, but it depends on our current income. If we have a very low salary, the extra $100 will make a big difference. But, if we earn $100,000 a year, we may not notice that extra $100 a year. The importance of this is for choosing the right balance between work and leisure. What is the value in working a long working week, if the extra money earnt has a limited marginal utility?

Externalities

pollution-smog

Economics may feel we are promoting selfish ends – firms maximise profits, consumers maximise their personal utility. Adam Smith claimed pursuing selfish goals ended up in improving the greater good. But, in economics, we also try to consider the impact of our actions on other people. If a firm produces chemicals, it may make a profit, but cause an external cost of pollution. To ignore this external cost would be to create an inefficient outcome. We should make the firm pay the cost of its pollution so that it has the incentive to minimise or halt external costs. Externalities are everywhere. Even your decision to study economics could have positive externalities in the future. For example, you could end up being an economics teacher helping others learn all about economics.

Public goods not provided by the free market .

public-good

The free market has many advantages. Private firms tend to be more efficient, innovative and respond to consumer preferences. However, many goods and services would either be not provided or under-provided in a free market. Public goods like street lighting and law and order. Also, public services like health care and education would be provided in insufficient quantities. Therefore, to optimise social welfare there is a need for government intervention through taxes and direct public provision. We may dislike taxes, but we would dislike not being able to see a doctor.

Should I worry about automation and new technology?

There are concerns that new technology and automation will lead to job losses and some people losing out. If our job is threatened by new technology is the fear justified? Economic analysis suggests there it is a fallacy that new technology leads to permanent job losses. This is known as the Luddite Fallacy – though some jobs are lost, new ones are created. Automation and new technology are not guaranteed to make everyone better off – especially in the short term. See: Pros and cons of automation

luddite-fallacy

Macroeconomics affects everyone

Everyone is affected in some way by macroeconomic issues such as inflation and unemployment. Inflation can reduce the value of your savings. If you keep cash under your bed during high inflation, you’d be better off trying to buy gold or some physical assets. Mass unemployment can cause society to fragment, therefore there is a need to adopt policies to try and reduce unemployment.

Life-cycle hypothesis

LIFE-CYCLE-WEALTH

The Life Cycle Hypothesis states that to maximise lifetime utility, we should try to smooth our consumption patterns over the course of our life. It is not good to have substantial income when we are old and unable to move. Spending some money in our student years will give greater overall utility. This justifies taking out a student loan to pay back when we are working and then saving for a pension in our retirement.

Examples of economics in everyday life

  • Is the price of Starbucks a rip-off?
  • Is it rational to put money in an honesty box?
  • How will you be affected by a devaluation of the Pound?
  • How will you be affected by low-interest rates?
  • How will you be affected by a recession?
  • 10 reasons to study economics

Last updated: 10th November 2021, Tejvan Pettinger , www.economicshelp.org, Oxford, UK

11 thoughts on “Applying economics in everyday life”

Very nice article especially to beginners (students). It’s easily understandable.

interesting

Great, i like economics, its interesting and fascinating.

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concepts are very clear and nite becouse initially importance of economics..

Very easily explained.Make more like these.

make a poem about economics using many different economic topics and email it back to me please its for an economics project !!!

Being an economics student ,it is Very informative for me ….

Very comprehensive thoughts. The application of both micro and macro economics in daily life is lot yet people don’t realize. For example , when you go to mall to purchase your daily needs or other products, you simply calculate opportunity cost between two products. And as a rationale consumer select one product over other who’s marginal value is more. Soon meet you with more such concepts

I like this. I really helps me as I have to constantly explain these concepts everyday. It’s just nice to know others feel the same.

Quote inspiring. Our everyday application of Economics concepts are enormously. We always use public roads ,streetlights, sewer lines and public security. We also complain about those not using them well without knowing that once these goods and services are provides, we can not stop others from using it, neither can the consumption by others reduce the quantity available for our consumption.

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Campus news and industry insights from boston college, how can economics change the world applied economics in a complex world.

Smart city network concept overlaid an image of highway traffic moving through a large city at dusk.

Why study economics? Because economics can change the world. In fact, without economics, it is arguably impossible to affect any substantive change. Economics defines what we value and how we exchange value in the real world. Like the sun that provides energy for life on Earth, economics is the driving energy of society.  

It is tempting to think of economics as an arcane topic practiced by economists in ivory towers, the purview of professors and central bankers. When economics does impact our lives, it feels beyond our control: bubbles, interest rates, rising prices, and stagnant wages. Such are the consequences of human decisions, unforeseen circumstances, and social imbalance–economic decisions and policy outcomes.  

Human culture is the expression and organization of a plurality of people sharing a common bond. These bonds are formed by institutions and beliefs, national or ethnic identity, business and commerce, art and language. Any shared values among groups of people serve as foundations for culture. Economics is the framework of cultures and civilizations, the “ tangible science of social organization .”  

We study economics to understand that framework. We study applied economics to use that understanding in making a better world.

What is Applied Economics in a Complex World?

Applied economics is a problem-solving tool–economics in action. From healthcare to global security, environmental economics to sustainable human development, the mechanisms of economics shape market and social forces, forecast future scenarios and determine solutions to the challenges we face.  

Econometrics is one of these tools. The primary function of econometrics is to” convert qualitative statements into quantitative statements,” writes Ayush Singh Rawat.  

Econometrics uses mathematical and statistical methods to “ justify a theoretical economic model with empirical rigor .” In other words, econometrics clarifies the viability of an economic theory as applied in real-world circumstances.

Complexity Economics

But the “real world”–unlike traditional economic assumptions –is irrational, full of dynamic, interconnected, and often wicked problems. Theories based on assumptions of rational agents acting in a static world create “an elegant economics, but is restrictive and often unrealistic,” writes W. Brian Arthur in Foundations of Complexity Economics . It is not hard to see how unchanging, unrealistic economic presumptions break down in a complex, conflicted, rapidly changing world. There is no “Homo economicus.”

“Complexity economics relaxes these assumptions,” Arthur writes. “It assumes that agents differ, that they have imperfect information about other agents, and must try to make sense of the situation they face.”  

The more we embrace complexity, the better our responses to the challenges of a volatile century undergoing systemic transformation. Like tree branches, resilient in their flexibility to the winds of change, a  complexity mindset helps us adapt to an evolving world. Paired with the tools of applied economics, embracing complexity creates the context for problem-solving and change.  

How Economics Can Change the World

We understand how economics is the foundation for collective human action. We know that, through applied economics, a complexity mindset, and using tools like econometrics, we can analyze quantitative economic theories, translating those theories into qualitative statements based on real-world data.  

However, we’re still looking at applied economics from a 20,000-foot perspective. What does it look like for changemakers interested in using applied economics to solve problems?  

Let’s look at two perspectives, one historical and the other forward-facing.  

Bretton Woods and International Development

As World War II drew to a close, delegates from 44 nations met in Bretton Woods , Maryland, to forge an accord to rebuild a devastated Europe. In the aftermath of war, world leaders sought agreement to restore war-ravaged economies in the short term and create a lasting economic order of international cooperation.  

Officially known as the United Nations Monetary and Financial Conference, the summit established the International Bank for Reconstruction and Development (IBRD). From the IBRD’s charter came the International Monetary Fund and World Bank .  

Bretton Woods and the global economy it fostered are not without controversy . It is, in any case, a profound example of how economics influences a community of nations and the lives of its inhabitants. The fixed-exchange rates set by Bretton Woods ended in the 70s, yet we live in a world shaped by the ideas and policies of the agreement’s authors.  

Today, the IMF and World Bank employ global trade and development professionals. The problem-solving tools of applied economics address systemic poverty , stabilize global financial systems, and promote sustainable development.     

Sustainability and the Circular, New Energy Economy  

Sustainability economics is increasingly mainstream in business, governance, and society. The ongoing economic and social transformation–let alone a global pandemic–is no less earth-shattering than the post-war world that emerged in the 1940s.  

Through globalization, the economic juggernaut that arose as the US shifted its wartime manufacturing might to American consumers stretched around (most of) the world. With it came prosperity and higher living standards to more people than ever before in human history. But, without an appreciation of complexity and change, the downside of this expanding growth eventually comes home to roost.  

Today, our challenges include widening gaps in income equality, persistent– if declining –extreme poverty, and a world bumping up against ecological and resource limits . Meeting these challenges obliges the malleability of applied complexity economics.  

If “sustainability” risks becoming a marketing catchphrase, data-driven econometrics sorts the green from the greenwash. Visionary policymakers, economists, and multisectoral leaders help us frame what a  circular , new energy economy looks like and how we might get there .  

As before, these are controversial issues eliciting heated debate and emotional rhetoric. It is here that applied economics must reside. Like in Bretton Woods more than half a century ago, we must decide what kind of world we want to live in and how economics must work in the 21st century to make it so.    

Unlike Bretton Woods, all motivated, knowledgeable, and visionary people are called to the table to help create a better world.  

Boston College Master of Science in Applied Economics

Johann Wolfgang von Goethe famously said, “Knowing is not enough; we must apply. Willing is not enough; we must do.”  

The online Master of Science in Applied Economics degree program is built from the ground up for professionals driven to “do.” They understand that doing demands knowledge, ethics, experience, mentorship, and collaboration.  

Program director Dr. Aleksandar “Sasha” Tomic and his team consistently attract top talent from all walks of life into the program. “We are resolutely student-focused in everything we do,” says Dr. Tomic. “I am continually impressed with the caliber of students the program attracts.”  

The industry-aligned program trains students in applied economics tools, methods, and principles. Students gain insight into industry and global trends, understand complex policy issues, and have the analytical skills to frame viable solutions.  

The curriculum rests on the Jesuit, Ignatian tradition emphasizing reflective, ethical, people-centered decision-making. Students emerge from the program prepared to start or advance their careers in government, healthcare, global development, policy, and industry.  

Earning the MSAE degree requires completing five core and five elective courses. Students can choose among 26 elective courses.

The MSAE program is a launching pad, forging mentorships and collaboration among instructors and students. Everyone is encouraged to learn from each other, create ideas, test theories, and affect change in the world to the extent of their interest and capacity.  

At a Crossroads

“The global economy and capitalism are at a crossroads,” summarizes Kaushik Basu in an op-ed for Brookings. “Economists and society as a whole must confront profound intellectual and moral challenges in order to come to grips with the changing world.”  

Now is the time for people willing to apply their talent, passion, and knowledge to confront the myriad challenges we face. There is a home for such people in the Master of Science in Applied Economics program at Boston College.  

Can economics change the world? History shows us how it has. Applied economics tells us how it can.

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COMMENTS

  1. Applying economics in everyday life

    Some of this is just common sense, but economics can help put a theory behind our everyday actions. Buying goods which give the highest satisfaction for the price. 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 ...

  2. Applied Economics

    Applied economics helps us deal with real-world problems by making the abstract tangible. Understanding abstract theory is often not enough, and it must be tested and put into practice in order to effectively understand and critique economic concepts. Consumers, economists, and scholars alike can use applied economic theories to test existing ...

  3. Can Economics Change the World? Earn a Master in Applied

    Because economics can change the world. In fact, without economics, it is arguably impossible to affect any substantive change. Economics defines what we value and how we exchange value in the real world. Like the sun that provides energy for life on Earth, economics is the driving energy of society. It is tempting to think of economics as an ...