Economics is defined as the study of how society manages its scarce resources (Mankiw 2009). It is said to be “the theory of all human action, the general science of the immutable categories of action and of their operation under all thinkable special conditions under which man acts” (Callahan 2004). In simpler terms, we all apply economics in our daily lives, whether it is for making a decision on which toothpaste to buy or deciding on which country to travel to. The theory of economics is applied to every decision we make. It helps us get a deeper understanding of our own situation as acting humans and helps us make better decisions (Callahan 2004). It helps us put our choices into perspective, as it makes us understand that our costs are measured in terms of our foregone alternatives (Callahan 2004). Economics can be further divided into two forms; Microeconomics and Macroeconomics.
Microeconomics can be considered as field which is inherently more relevant to an individual. It is a study of decisions that people and businesses take in regards to the allocation of resources and prices of goods and services. It focuses on the supply and demand along with other forces that help determine prices levels in the economy. Macroeconomics meanwhile focuses on the larger scale. It studies the behaviour of the economy as whole and not just on specific groups of people.
In order to better explain the concepts of economics and how it relates to our daily lives, we would be looking at the ten principles of economics, focusing more on the first six. First, we would be looking at principles that help influence our decisions as individuals.
The first principle states that people face trade-offs. In simple terms it means that in order for us to get something we want, we have to forsake something else (Mankiw 2009). It states that making decisions means trading off one goal for another. For example, we are all currently post graduate students at Monash University, with many of us being international students. Most of us have forgone the decision to start working in order to pursue further studies. In this situation the trade-off is between postgraduate studies and working. The concept of trade-off implies that for every hour I spend at university attending lectures or doing assignments, I am forsaking an hour which could be spent working, sleeping or watching tv etc. Same would be true as to when we plan out our budget. For example I may decide to spend most of my money on rent and food instead of spending it on leisure activities. In this case the trade-off is between my decisions on how I choose to allocate my budget.
In order to better understand trade-offs, we look at the second principle of economics; costs and benefits of pursuing further studies. For me personally, the benefits would be the chance to gain more knowledge, have a better understanding of my chosen career field, and better job opportunities etc. Whereas costs would be criteria such as tuition fees, living costs, giving up work and potential earnings, being away from family etc. When looking at the concept of opportunity cost, which is cost you give up to obtain something. For example, looking back at my decision to pursue further studies, an opportunity cost could be the earnings that I will give up from deciding not to work. Based on my personal perception, I believe that the opportunity cost was not high enough to deter me from pursuing a master’s degree. The third principle of economics states that people are rational. It states that rational people will purposefully and systematically do the best they can to achieve their objectives, given the available opportunities (Mankiw 2009). According to this principle, Rational people know that things are not always black and white, but shades of grey. They often make decisions by comparing marginal benefits and marginal costs (Mankiw 2009) Looking back to my example of pursuing further studies as opposed to starting