Hello!

Thesis: Economics can get overly complicated quickly, preventing many from understanding key concepts that apply to every situation, from buying bananas to issuing green energy subsidies to owning a bakery. If we simply taught economics to an everyday audience instead of economists, the impact on the world would be immeasurable.

“Most people think economics is a technical, confusing, and even mysterious subject. It’s a field best left to the experts: namely, the economists”

-Jim Stanford, Economics for Everyone

Credit Prospects High School

Economics is for Everyone

Yet, you don’t need to be an economist to know a lot about economics. Everyone is involved in the economy, even if they don’t realize it.

Traditionally, the barriers to entry into economics have been the economists themselves. You generally only see them on the news, talking about complex problems using highly technical jargon to explain how the world works. Trying to explain the world, they show things like this and expect you to understand:

Credit Master of Economics

This view of economics is detrimental to the everyday person. People see these complex equations and hear the complicated verbiage, and are immediately disinterested.

So, let’s go back to the basics.

Let’s not even get into equations today and simply work conceptually, using everyday examples of economics to hopefully motivate you to think a little more about the way things work in the world.

Economic Concept #1: Motivation

Generally, when many people hear the word economics, they think about the economy or the government. While this view isn’t wrong per se, it leaves out so much of the world of economics.

At its core, economics creates ideas about human nature and behavior. Nothing more. It provides information about how people think, how people act, and how people are going to think and act.

Consider the concept of supply and demand, a basic economic framework that describes what quantities of products or services are available in the market and how much demand from consumers there is.

A supply and demand graph looks like above where the supply line slopes up (suppliers will provide more quantity of the good if they can get more money for it) and the demand line slopes down (more people will buy the good if the price is lower).

Credit Everyday Health

Bananas.

Let’s say you love bananas and go to the store to purchase them. In your mind, subconsciously, you already know how many bananas you want to buy. Let’s say that number is 5. Yet, when you get to the store, you find the price of bananas has doubled since you last went there, going from $1 per banana to $2. Saddened, but still wanting bananas, you buy 4 instead of 5.

Alternatively, let’s say you walk in and bananas are $0.5 per banana instead of $1. You seize on this deal and buy 7 bananas instead of your original 5.

To recap:

• Scenario 1: You buy 5 bananas for $1 each = $5 for the store
• Scenario 2: You buy 4 bananas for $2 each = $8 for the store
• Scenario 3: You buy 7 bananas for $0.5 each = $3.5 for the store

Congrats! Given these 3 data points, the store is able to draw conclusions from your behavior to interpret what you will do in the future and what they should do to provoke such behavior. Essentially, they’ve seen through your purchasing what motivates you and what doesn’t.

What they know:

• You love bananas
• You love bananas so much that you are willing to pay a little more for them
• You love bananas so much that you’ll buy more when the price is lowered

How they can use that behavior to benefit themselves:

• In our example, the store is able to see that they make the most money from the transaction when the price is actually double. So, they’re motivated to keep the price high.
• They know when they have an excess supply of bananas (too many) they are able to lower the price and you will buy more (they don’t have to throw them away).

Now, did you have to actually tell the store that you love bananas? No. Did you tell them that you love bananas so much that you’re willing to pay more for them? No. Did you tell them that you love bananas so much that you’re willing to buy more when the price is less? No.

Yet, they’re still able to gather that information about what motivates you by simply doing what you normally do.

In economics, a big portion of theory and time goes into explaining this concept, specifically why people are doing what they do. Most of the answers to this question can be explained simply by the following:

People do what they do based on what they plan to get out of it.

Credit IconScout

Consider the concept of a job. The employer hires the employee because they expect that the benefit (results) they will get from the employee’s work will be more valuable than the salary they have to pay them. Simple as that.

If you don’t get hired for a job, you can know that the benefits the company expected to gain from your employment were less than they were going to pay you, so they would end off negative (so there is no reason to hire you).

Sounds terrible, but that’s economics. Simply explaining why people do the things they do.

Credit Medium

Economic Concept #2: Strategy

Referring back to our banana example above, here’s how economic motivational knowledge is put into practice:

Let’s say the store has to sell 15 bananas before they go bad. They know you’re going to buy bananas 3 times before they go bad. What’s the best way for them to sell the bananas?

• Scenario 1: They keep the price at $1 each. You go in 3 times and buy 5 bananas each time for a total of $15.
• Scenario 2: They double the price to $2 each. You go in 2 times and buy 4 bananas each time for a total of $16. Then the last time, they lowered the price to $0.5 each. You buy 7 bananas for a total of $3.5. This brings the overall total to $19.5.

So, given that economics gives us information about individuals’ motivations and behavior, people (generally in businesses and governments) can use these insights to determine the best course of action for the future.

Economics is simply a math-heavy strategy field. Put simply, economics is the study of how to evaluate alternatives and make better choices. It enables people to develop critical thinking and problem-solving skills to strategize in order to make good decisions.

Credit iStock

Consider another example:

A business that offers budgeting solutions to customers wants to expand its product offerings to include tax preparation services.

They start by assessing their customer’s current state, mainly the benefit the company is providing that customer. Let’s assume they only have one customer, for simplicity’s sake. In economics, the concept of benefit is simply the most someone would pay for this product/service and be even (cost to them = the benefit they receive).

Through some analysis, the business learns its customer is $15 better off than they previously were without this software. The company currently charges $5 for the product as a price, so the net benefit to the customer is $10 ($15 benefit – $5 price).

Considering this new tax software, the customer decides that it will increase their benefit by $10 (putting their total benefit at $25). The company sees that the customer would be willing to pay up to $25, so they choose to set the new price of the service at $10 (making the customer’s net benefit now at $15).

By adding this new product, the company was able to create value (added benefit to the customer) as well as capture some of that value (increased price).

In this scenario, both parties are better off with this trade-off. The customer receives more benefit from the situation and the company receives more money in return for its product.

By knowing how their customer is motivated to act and what drives their benefit, the company was able to strategically understand that they should open this new tax product.

Credit Corporate Compliance Insights

Economics Concept #3: Incentives

Economics is about studying human behavior, yet many times that behavior is suboptimal. How do you get people to change their behavior?

Incentives.

Incentives sound more like a topic to discuss in a psychology class, and you would be completely right. There are 2 broad types of incentives, intrinsic and extrinsic. Intrinsic incentives are found within an individual, their inner motivation to do something for their own sake, without outside pressure or reward.

Economic incentives deal with extrinsic incentives, mainly providing material rewards for accomplishing a task, or threatening punishment for failure to do so. To change what motivates someone, we have to offer them something better and assume that a rational person would choose the better option.

Credit PresenterMedia

Consider a relevant modern political issue: Green Energy Subsidies.

As it stands, producing and manufacturing “green” products is more expensive than it would be to produce them normally. But the government wants you to produce these green products, so what do they do? Offer a subsidy, a payment to offset the additional costs generated from green production.

This incentivizes businesses to start manufacturing and selling more green products, leading to a general market shift. As these products continue to be manufactured, the costs generally start to go down, meaning that the prices can be more competitive with “normal” goods and so the government can stop offering the subsidy.

This is how economics gets involved in politics. By studying human behavior and understanding the analytical rationale behind choices, economists are able to build models to predict human behavior and then understand what type of incentives they would need to act in a certain way.

With every choice, even if there is an incentive attached, there are also other choices that could have been made, trade-offs – other choices you could have made.

In economics, we call this the opportunity cost, defined as the potential forgone benefit from the next best alternative. Some choices will have large opportunity costs and others won’t

Credit Encyclopedia Britannica

Consider the most common economic example of an incentive: Price.

During the last year, the price of eggs skyrocketed in some areas. Let’s assume you’re a baker and you use eggs in your products. When the price of an egg goes up, you have a choice, to continue using eggs in your traditional products and charging your customers a higher price or you could pivot to a new product that doesn’t include eggs.

The tradeoff is clear, you can only choose one or the other. In this case, the example describes a disincentive, where the price creates an incentive for you to stop doing something.

In addition, your choice as a baker has an opportunity cost. If you choose to continue your traditional product at a higher price to the consumer, you may lose customers that are price sensitive (negative impact on your profit), but if you choose to pivot to a new product that doesn’t use eggs, you might lose customers that don’t like the new product (negative impact on your profit), but you might gain some new customers (positive impact on your profit).

Is the cost worth it? That’s where the rest of economics comes in, as described above. What is motivating people to purchase your product? What strategy can you employ? Can you incentivize your customers to continue to purchase with you even when the price goes up?

Economics is Applicable Everywhere

From eggs to bananas to green energy to budgeting software to job applications, almost everything deals in some way with economics.

So, logically, economics is for everyone, not just economists, and the data backs this up.

Economics degree career placement stats from the University of Houston and the University of Virginia show that economic concepts apply to all careers.

So, if economics applies to pretty much everything, how do you go about getting more knowledgeable about economics?

Filthy Self-Promotion Alert!: You should subscribe to this blog, Insights, Innovation, and Economics. We discuss economic principles put into action weekly along with deeper dives (like this) on key economic topics.

Besides this blog, read other top economic news sources like The Economist, The Econometric Society, and The Quarterly Journal of Economics. In addition, consider watching educational videos on YouTube, following economic content creators, or even taking an economics course.

Through economics, you can understand more about yourself and the world around you.

Anywho, that’s all for today.

-Drew Jackson