Economic Concepts Consumers Need To Know
Scarcity
You implicitly understand scarcity, whether you are aware of it or not. It is the most basic concept in economics, and is more of a solid fact than any abstraction. Simply put, the world has limited means to meet unlimited wants, so there is always a choice to be made. For example, there is only so much wheat grown every year. Some people want bread; some people want cereal; some people want beer, and so on. Only so much of any one product can made because of the scarcity of wheat. How do we decide how much flour should be made for bread? Or, more importantly, how much beer to make? One answer is a market system.
You implicitly understand scarcity, whether you are aware of it or not. It is the most basic concept in economics, and is more of a solid fact than any abstraction. Simply put, the world has limited means to meet unlimited wants, so there is always a choice to be made. For example, there is only so much wheat grown every year. Some people want bread; some people want cereal; some people want beer, and so on. Only so much of any one product can made because of the scarcity of wheat. How do we decide how much flour should be made for bread? Or, more importantly, how much beer to make? One answer is a market system.
Supply and DemandThe market system is driven by supply and demand. Take beer again. Let's say people want more beer, meaning the demand for beer is high. This demand means you can charge more for beer, so you can make more money on average by changing wheat into beer than grounding that same wheat into flour. More people start making beer and, after a few production cycles, there is so much beer on the market that prices plummet. Meanwhile, the price of flour has been increasing as the supply shrinks, so more producers buy up wheat for the purpose of making flour - and on, and on
This extreme and simplified example does encapsulate the wonderful balancing act that is supply and demand. The market is generally much more responsive in real life, and true supply shocks are rare – at least ones caused by the market are rare. On a basic level, supply and demand helps explain why last year's hit product is half the price the following year.
Costs and Benefit
The concept of costs and benefits encompass a large area of economics that has to do with rational expectations and rational choices. In any situation, people are likely to make the choice that has the most benefit to them, with the least cost, or, put another way, the choice that provides more in benefits than it costs. Going back to beer, the breweries of the world will hire more employees to make more beer, only if the price of beer and the sales volume justifies the additional costs to the payroll and the materials needed to brew more. Similarly, the consumer will buy the best beer he or she can afford, not, perhaps, the best tasting beer in the store.
The concept of costs and benefits encompass a large area of economics that has to do with rational expectations and rational choices. In any situation, people are likely to make the choice that has the most benefit to them, with the least cost, or, put another way, the choice that provides more in benefits than it costs. Going back to beer, the breweries of the world will hire more employees to make more beer, only if the price of beer and the sales volume justifies the additional costs to the payroll and the materials needed to brew more. Similarly, the consumer will buy the best beer he or she can afford, not, perhaps, the best tasting beer in the store.
This extends far beyond financial transactions. University students perform cost benefit analysis on a daily basis, by focusing on certain courses that they believe will be more important for them, while cutting the time spent studying or even attending courses that they see as less necessary.
Of course, everyone knows someone who has seemingly made a poor life choice. Although people are generally rational, there are many, many factors that can throw our internal accountant out the window. Advertising is one that everyone is familiar with. Commercials tweak emotional centers of our brain and do other clever tricks to fool us into overestimating the benefits of a given item. Some of these same techniques are used quite adeptly by the lottery, showing a couple sailing a yacht and enjoying a carefree life. This image and its emotional message ("this could be you") overwhelm the rational part of your brain that can run the very, very long odds of actually winning. Cost and benefits may not rule your mind all the time, but they are in charge more than you think - especially when it comes to the next concept. (This free thinker promoted free trade at a time when governments controlled most commercial interests. Check out Adam Smith: The Father Of Economics.)
Putting It All Together
Scarcity is the overarching theme of all economics. It sounds negative, and it is one of the reasons economics is referred to as the dismal science, but it simply means that choices have to be made. These choices are decided by the costs and benefits that impact the choice, leading to a dynamic market system where choices are played out through supply and demand. On a personal level, scarcity means that we have to make choices based on the incentives we are given and the cost and benefits of different courses of action. This is a very broad look at what is, believe it or not, a very compelling subject. These concepts feed into others, like comparative advantage, entrepreneurial spirit, marginal benefit and so on. The world is wide with choices, so the field of economics is wide with theories, laws and concepts that explore those choices.
Scarcity is the overarching theme of all economics. It sounds negative, and it is one of the reasons economics is referred to as the dismal science, but it simply means that choices have to be made. These choices are decided by the costs and benefits that impact the choice, leading to a dynamic market system where choices are played out through supply and demand. On a personal level, scarcity means that we have to make choices based on the incentives we are given and the cost and benefits of different courses of action. This is a very broad look at what is, believe it or not, a very compelling subject. These concepts feed into others, like comparative advantage, entrepreneurial spirit, marginal benefit and so on. The world is wide with choices, so the field of economics is wide with theories, laws and concepts that explore those choices.
Conclusion
These concepts aren't powerful laws that force human interactions into preset patterns. Rather, they are a recognition of the patterns that emerge from hundreds, thousands, millions and billions of individuals making choices with the information they are given. While knowing these concepts may not allow you to fundamentally change the world, it will help explain a lot. (Discover the theories that shaped the way we've come to understand economics. Refer to The History Of Economic Thought.)
These concepts aren't powerful laws that force human interactions into preset patterns. Rather, they are a recognition of the patterns that emerge from hundreds, thousands, millions and billions of individuals making choices with the information they are given. While knowing these concepts may not allow you to fundamentally change the world, it will help explain a lot. (Discover the theories that shaped the way we've come to understand economics. Refer to The History Of Economic Thought.)
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