What Is Economics For?

We are all economic beings. We make hundreds of decisions every week based on economic factors. We would make better decisions if we understood the playing field and the rules of the game.

I recently discovered this 10-minute video that does a commendable job of explaining the basics. Invisible Hands: The fundamentals of Economics

The factors in economic thought

There are 6 factors we find in the video:

  1. Individual action
  2. Scarcity
  3. Choice
  4. Trade-offs
  5. Subjective Valuation
  6. Incentives

Individual Action

Nothing happens until someone makes a decision and acts. In economics there is the field of macro-economics which deals with the mile high view of the situation. It is the study of the accumulated actions of many individuals. All economics begins with individuals and how they decide and act on situations that affect them directly.

Scarcity

There is always scarcity. No one has, or can have, everything they want. It relates to resources we need to get what we want. The most common ones are money, time, and energy. We tend to think of money as the basis for economics but the thought processes connect well to anything in scarce supply.

Choice

Once we recognize scarcity, we must choose. Should I go to the casino with my paycheck or should I pay the hydro bill? Should I spend or save? Should I do somehting now or should I wait and do it later?

Choice causes automatic conflicts. If I have scarce resources, when I choose one thing, I always must give up having some other thing. Understand the idea of opportunity cost. The cost to not do something that could be beneficial.

Learning to choose is an important skill.

Trade-offs

Trade offs mean I can find ways to get some or most of what I want with a smaller allocation of resource. What I get may not be exactly perfect, but good enough. Maybe I buy a cheaper model car and a vacation. Maybe I wait for a sale. Maybe I rent instead of buying. Maybe I eat hamburger with a fine sauce instead of a steak.

There are an infinite number of tradeoffs.

Subjective valuation

Recall the individual action principle. We do what we value and that need not be like what anyone else values. Smart shoppers look for motivated sellers. To do so they may need to wait. If you are in no hurry to spend your time resource, the money resource will be worth far more.

Never assume anyone else exactly matches your personal preferences.

Incentives

Because we value subjectively, we make choices to match our preferences, and we trade-off our wants and resources to get what we want. We respond to changes in the context that can redirect our effort. Everyone responds to incentives. That’s why merchants have spring sales. That’s why governments organize the tax system to induce people to do things differently.

By the same argument, people avoid disincentives. We tend not to park in no parking spaces because we might get a ticket.

Watch the video. It is something you could share with a teenager and expect them to understand.


I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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