Economics is present in our everyday life. It is a branch of science just like Biology, Physics, and Chemistry. The concepts of economics can be observed in every activity, monetary transaction, and finance-related decision we take in our lives. Let us discuss it further with the help of a few examples!
- Purchasing Goods that Offer the Highest Satisfaction for the Price Paid
We compare the price paid for a commodity to the satisfaction it brings us. If the commodity purchased is useful and has utility, a consumer would consume more quantity of it. For example, airlines charge every passenger a basic fare but when you demand facilities like extra legroom, priority-boarding, a window seat, or an upgrade to the business class, there’s an additional cost attached to thee facilities. Hence, this is an example of the presence of Economics in our everyday life. As a consumer, if we decide that by paying extra we get more benefits and it makes sense to us, it means we analyzed its marginal benefit in comparison to the marginal cost.
- Sunk Cost
Sunk cost means when the money paid for certain services, goods, or commodities is irretrievable. For example, let us talk about gym memberships. So many of us are tempted into signing up for an annual gym membership. Initially, we might be regular at it, knowing that it is important for our health, and we have paid the fee for it. Somehow, in between, we might not be attending the gym regularly. Whether we attend it regularly or not, we cannot get a refund for the annual fee that has been already paid. So, in this situation, we’ll have to write off the annual gym membership as a sunk cost.
- Opportunity Cost
The science of Economics tells us that resources are scarce and limited. Scarcity means that the resources available are less in quantity than their demand. The concept of opportunity cost rises from this fact. For example, if we spend all our money on buying food, we won’t be able to spend money for other purposes such as entertainment, health, and lifestyle. The concept of opportunity cost states that we must inspect all the factors attached to the choices we make.
- Economics is in our Behavior
Economical theories assume man to be rational. But, behavioral economics states that man can make biased decisions depending upon behavioral factors. Let us understand this notion with the help of another everyday example. We all tend to give ‘entertainment’ a lot more important in our day-to-day life. We do not realize its long-term implications for our future. Consumption of junk food and alcohol in the present reduces the scope of having a secure retirement in the future. Hence, by spending more money on our present-day entertainment needs, we are neglecting our long-term welfare.
- Diminishing Returns
The concept of diminishing returns states that as we consume higher quantities of something, we start experiencing less satisfaction from it. The same concept also implies money, also known as diminishing returns to money. The more money we earn, the less time we get to spend that money. For example, earning an additional 100$ will give us more utility and purchasing power but we will have less time to spend that money.
From opening a bank account to fixing a budget for your expenses, every activity involves Economics. It is an integral part of our daily lives.