Blog By – Aman Ganguli and Aditya Diwakar
What is Fish without water? The Earth without the Sun?
That is life without Economics.
Economics is carried out in every aspect of our lives whether we receive money income when we’re buying, selling or paying taxes or even, deciding to buy something.
Starting with the Law of Demand and ending up in the law of Profit maximization, Economic concepts are an essential part of our daily lives.
At the end of the way, what Economic Entities such as buyers and sellers care the most about is satisfaction. “A Rational consumer always tries to maximize his level of satisfaction, given the resources available to him.”
Say, you go into a store to buy a pen for your exam next day. You have only got Rs 10 so as a rational consumer you are going to buy the pen that gives you the most satisfaction, assume you bought the pen A. Sounds good and you have made a rational decision.
Imagine now that your friends in school told you one day before the exam that all of them have purchased pen B and it also costs Rs 10. Now imagine walking into the store once again with Rs 10 and buying pen B( even though pen A gives you more satisfaction).
Does this mean you are not acting according to the law of economics?
No. It only means you are not being “rational”.It does not mean you have made a wrong decision or when you bought pen A you made the right decision.
The important point is humans like you and me are not always rational we are prone to bias and irrational behavior. This is where a new branch of Economics comes up i.e. Behavioral Economics.
The Veblen Effect, Giffen paradox and the paradox of plenty are examples of such bias and irrationality.
Coming to another daily occurring phenomenon
The Law of Diminishing Returns tells us that consumption is not infinite and the satisfaction derived from the consumption decreases as the consumption increases. Well, what it means is suppose you are a tea lover you go to a tea shop and pay Rs 15 for your first cup of tea.
Will you be willing to pay the same amount for a second cup as well?
Most of you will not some of you may pay. Now ask yourself are you willing to pay the same amount for successive cups of tea that you are consuming.
This concept is explained by Law of Diminishing Return since your want of “urge to drink tea” has been fulfilled by 1st or/and 2nd cup of tea you would be willing to pay less as the 3rd 4th 5th cups do not provide you with the same level of satisfaction.
We end this article with the most common occurring principle of Economics in our daily life i.e. Trade-off. The biggest trade-off is between the things that we normally do and Time. Time, although not considered to be an economic entity, is a regulatory body for most Economic processes ranging from the demand for a commodity to the cost of producing it. Economics in the short run is always turbulent and unsteady compared to the Long Run where everything is put to rest.
As students, Opportunity Cost is a concept which is very essential to be understood. The opportunity cost of every extra hour that we sleep in a cold, winter morning is a missed lecture and more importantly, attendance. The cost of every long walk to the tea stall is not only the price of a cup of tea but also, an important concept which was taught in class that day and was to be examined by the professor the next day.