Introduction
Economics is defined as a social science that deals with how people utilize the limited resources, to satisfy the unlimited needs and wants (Baumol and Blinder, 2008). Economics is applicable in our day to day lives, thus it is important to have some rudimentary understanding of economics. Many of the concepts learnt in economics are helpful to any person living in this ever changing world, as will be discussed below.
Importance of Economic Concepts
Scarcity is the most fundamental term in economics. It implies that there are hardly enough resources in this world such as money and time, to fulfill our unlimited wants and needs. It is therefore important that individuals learn how to distribute these scarcities to fulfill their needs (Baumol and Blinder, 2007).
Everyday we must make choices and decisions that will assist us in allocating these scarce resources. For example, when you go out shopping in a supermarket, you might notice a trendy top or an expensive perfume that you have always fancied. However, due to scarcity of money you will not buy these items, but shop for necessities such as bread, groceries, milk, soap and cereals.
Another economic term that is important and pertinent to our lives is specialization. Specialization refers to the situation where resources are mainly allocated to a particular task. Specializing resources, ensures these limited resources are more effectively utilized in producing services and goods that satisfy the human unlimited needs and wants (Baumol and Blinder, 2007).
For example, if a student decides to open an ice cream parlor that operates after school or during weekends, they can decide to do all the tasks such as collecting the cash, cleaning the tables, serving and preparing the ice cream.
However, productivity will increase if the student invites some of the friends and one takes up cleaning the tables, the other one scooping and serving the ice cream and the other one collects cash. They will be able to sell more ice cream and serve customers better, if each one of them performs the required task.
Opportunity cost is another essential economic term. This principle refers to the sacrifices that you make so that you can get something at its cost (Baumol and Blinder, 2008). A personal experience is that I had the choice of spending 8 hours in school or on leisure activities (watching movies, partying, camping, chatting on social networks etc) or working in a restaurant that pays $3 per hour.
All these choices had an opportunity cost. If I worked in the restaurant for $24 per day, the opportunity cost is that I won’t have enough time for leisure and studies. This can lead to lower grades in school, which could lower any prospective future earnings.
If I decided to concentrate on studies, I would give up pleasure and $30 dollars per day, which is the opportunity cost. However, in the long run, concentrating more in studies increases my chances of earning a better salary in the future.
If I decided to engage in meeting my friends or partying, I would have a good time for a short time, but sacrifice schooling and working. Using this principle of opportunity cost, I decided to pursue education, since it has the most beneficial outcomes in the long term.
Understanding macro economy is important, since leading economic indicators should always guide our decisions. Understanding perceptions on the economic outlook is vital when making investment decisions. For example, during times of economic recess, banks lower interest rates in an effort to encourage more borrowing and stimulate economic growth.
If at this time you are to get a mortgage, installment would be cheaper. On the other hand, savings would yield poor returns. During such harsh economics times, rates of unemployment and layoffs are high, so students can continue with their studies, as the chances of getting a job are slim.
Conclusion
From the arguments above, understanding basic economic terms such as opportunity cost, economic incentives, specialization and macroeconomics is important in our daily lives and when making investment decisions.
References
Baumol, W. & Blinder, A. (2008). Macroeconomics: principles & policy. New York: Cengage Learning.
Baumol, W. & Blinder, A. (2007). Economics: Principles and policy. New York: Cengage Learning.