Thursday, September 22, 2011


Economics should be required for all majors, if it isn't already. I know that as a general education and business course, it is required for all business majors, but I think it should be impossible to get out of school without it. It is that important.

Economics is important to understanding how markets work but also to just understanding human behavior and decision making. Ideally, individuals act rationally and in their own self interest. Adam Smith in The Wealth of Nations points out, "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest." While I have been known to occasionally make a loaf of bread for the pure joy of it, bakers bake bread because they know we will buy it from them, not because they're doing us some big favor.

When irrationality abounds (Tickle Me Elmo) people make bad decisions that are not in their own best interest. Occasionally order has to be restored by some outside force, such as government regulatory action, but generally speaking, the invisible hand of the market helps things stabilize on their own. When rare children's toys are selling for $1500 on the black market, it is not sustainable. The company will either start producing more or people will realize that is too much to spend on a doll or something else will give.

Opportunity cost is an important economic principle we would all do well to understand. The principle is that the cost of something is not only the monetary price we pay or the time we spend but also what we could have spent our money or time on instead. When I was in high school, I worked at Dairy Queen and would occasionally not get all my homework done, because I was working late. Once I had brought my book to work to read on my break or while washing dishes but didn't ever get to it. Then I forgot my book at work so was unable to read it when I got home or during my first period class and was thus unprepared for that day's quiz. The opportunity cost or what I gave up in order to work was points towards a grade in a class. Some might say that the money I earned was more important than the grade, as long as I passed the class, since it probably didn't change my GPA much if at all. Others might say that I was a fool and could have lost thousands in scholarship money by getting poorer grades. In the end it doesn't matter what anyone else thinks. It only matters what I think. And it matters that I have the information I need to make a decision. By understanding the trade-offs involved, I can truly make a decision. I actually did drastically cut back my hours and then eventually quit not too long after that, because I decided that the money I was earning was not worth the things I was giving up in terms of my classes and my social life.

Other important concepts to understand are that of comparative advantage (everyone wins when the person with the lowest relative opportunity cost creates that thing and then trades with others), price elasticity (the extent to which consumers still buy a product when the price goes up; gasoline is inelastic in the short term, because when the price goes up, you're stuck buying it anyway, but in the long term it is elastic, because people will eventually start changing their behaviors and buy more efficient cars if the price gets too high), and the benefits and drawbacks of tariffs and quotas when importing or exporting goods.

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