Economics. I know it sounds so boring and irrelevant to our life but trust me, the reality is that the word economics encompasses so much more. The word "economics" originates from the Greek word "οἰκονομία " (pronounced "oikonomia") meaning "household management". And no, I'm not referring to household chores (ugh). We can define economics as the study of how society (that's us as a whole) manages its' resources or more simply, the study of economies. However, what is fascinating is that economics is truly about the study of people. In this way, economics is wildly complex. But also in this way, we learn to predict one of the most unpredictable species, humans, when faced with situations related to resources. This is what makes the Greek origin of the word so ironic because currently, Greece's government is in economic turmoil. I won't delve into it but for a very simple explanation, it's a result of their massive debt. This also points us to why exactly economics is so important, lack of knowledge and action regarding the study of economics may lead to crises such as Greece's. Therefore, it's kinda imperative to learn about economics - but that's only considering the larger and international scale of economics. Believe it or not, we use economics in our daily lives as well. Yep. Most of the time, it's unintentional. You see, decision-making is one of the most vital concepts studied in economics. And who doesn't make decisions every day? "Am I going to read past the first paragraph of this blog?" is a decision you just made. Congratulations, you're one step closer to being a teen economist. Anyway, as I said, the human factor is one of the most important - if not the most important - things to consider when discussing economics. To understand the relationship of humans and our decision making skills with regards to economics, we turn to esteemed economist Gregory Mankiw. Gregory Mankiw, Professor of Economics in Harvard University, is one of the most respected and known economists in our time. He's contributed to a lot in economics but for now we'll delve into Mankiw's Ten Economic Principles, more specifically on the four economic principles regarding on how people interact. 1. People face tradeoffs 2. The cost of something is what you give up to get it 3. Rational people think at the margin 4. People respond to incentives "People face tradeoffs" I'd like to place focus and emphasis on this one as it's probably the most important of the four. Simply put, this statement tells us that people are always faced with decisions and that we always give something up when we make a choice. We see the truth in these words in our daily lives, from choosing what to eat for lunch to deciding whether to play with friends or do your homework. In a local context, the Filipino government is faced with tradeoffs all the time and sometimes it affects the people subtly and other times it affects us drastically. The government, and this doesn't only apply to the Philippines but other countries as well, has limited resources and due to this scarcity, are often forced to make decisions that drive us towards objective A but away from objective B. For example, when the government chooses to invest in arms, guns and the country's military, the government is given scarcer or lesser resources to invest in education, health care, agriculture, etc. "The cost of something is what you give up to get it." This reinforces principle number one, that we always give something up when we choose one choice over another but this also tells us that the resources we deal in aren't just limited to physical items like money or food but also include time and effort as well. Every action we do has an "opportunity cost". The economic term "opportunity cost" is whatever we forego whenever we make a choice. Your opportunity cost by reading this blog can be time browsing Facebook and Instagram. Another example, this morning I had a choice to eat ice cream or pancakes, I chose pancakes therefore my opportunity cost is the ice cream and everything else on the menu that I could potentially have eaten. "Rational people think at the margin" As decision-makers, this tells us that we should "think at the margin". To think at the margin is to think one step ahead. Being rational entails that we have to base our decisions on it's cost and benefits such that the benefits of the choice outweighs the opportunity costs. We must also analyze our choices and think ahead of them. What are the consequences of this choice? Will this choice lead to other choices? To think like an economist, we must consider these various questions. "People respond to incentives" Ever come across a sale in a popular clothing store then suddenly blowing all your money and going on a shopping spree because "it was 50 percent off"? That's you responding to an incentive. An incentive can be a bonus, special offer, a discount on products or could be moral and natural indentives wherein a person is driven by their morals, self-esteem, curiousity and their emotions. As human beings, we all try to take advantage of these incentives. It's these incentives that drive you forward and can be used as a tool to increase your performance. Want a pay raise or promotion? You have to work harder. The decision to work harder is fueled by that pay raise. A social issue we can use as an example to analyze would be the ASEAN integration for the Philippines. The ASEAN (Association of South East Asian Nations) aims to integrate the region and create an ASEAN Economic Community (think European Union). At first, it sounds perfect, more jobs, lower tax, easier transport between ASEAN countries, etc. but we learned that everything has a tradeoff and this is no exception. The integration, if we choose to accept it, will essentially open borders to other countries in an economic sense, and if we think at the margin, we introduce other, bigger, foreign companies in our local area. These better companies will overshadow our own local companies and lessen the opportunities for small Filipino businesses in this country. Also, when we remember that people respond to incentives and remember that other countries have better opportunities and jobs in store for our local workers, we realize that we will lose our smartest and most deserving citizens to other countries who offer better jobs than the Philippines, this is actually a pretty big issue now with the massive amount of OFWs (Overseas Filipino Worker) we have right now. My personal opinion however, is that we should accept the ASEAN integration because we are prepared for it and the marginal benefits outweigh the marginal costs. In conclusion, economics is important and relevant in our daily life because it allows us to see how people interact with decisions. We always face tradeoffs because there is always an opportunity cost to our choices, whether it be physical materials or the time to commit to it. To be rational decision-makers, we should realize that we need to think ahead of our choices and what roads it leads to and remember the fundamental fact that people will always be moved and motivated by incentives. Sources: Retrieved from: http://www.mb.com.ph/implications-of-the-asean-economic-community-first-of-two-parts/ Masigan, A. (2014, October 5). Implications of the ASEAN Economic Community. Retrieved July 19, 2015. Retrieved from: http://www.forbes.com/sites/investopedia/2012/08/21/the-role-of-opportunity-cost-in-financial-decision-making/ The Role Of Opportunity Cost In Financial Decision Making. (2012, August 21). Retrieved July 19, 2015. Mankiw's Ten Principles. (n.d.). Retrieved July 19, 2015, from http://www.swlearning.com/economics/mankiw/principles2e/principles.html Margins and Thinking at the Margin. (n.d.). Retrieved July 19, 2015, from http://www.econlib.org/library/Topics/College/margins.html Image retrieved from: http://i.kinja-img.com/gawker-media/image/upload/czcmmcsfz7pqehjuzmst.jpg
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AuthorHi, I'm Gabriel, a high school student at Xavier School writing this blog about economics aimed towards teenagers. Have fun! Archives
October 2015
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