The Philippine Online Chronicles

Have you been trying to understand what is happening in the financial world lately?  With all what happened last 2008 you probably have heard a lot`of economic jargons floating around the internet, newspapers, television and radio, and you might not have much grasp.

Do not worry, because all of us, including those with PhDs in Economics, are just starters in the field because economics is relatively a young discipline, if not the youngest, in academic (formal) terms.  However, economics has always existed along with other fields like engineering and medicine ever since.

The formal study of economics began as a simple analysis of household behavior (microeconomics). Then it branched out to something more holistic (macroeconomics); analyzing further the behavior of the overall economy with the intervention of government (public finance); analyzing the effects of money (all forms) to the economy (monetary economics); to verifying economic theories through math (econometrics); to something more specialized studies such as urban economics, operations research and the economics of happiness.

This is no wonder why economics is informally called the queen of all social sciences.  It touches base with all other branches of social science such as sociology, political science, psychology, geography and history.  Economics discusses the “why” and “how” of the behavior of people, businesses, and countries. It explains phenomena that shaped our world history (uncontrollable). It can also be a tool to shape the world in the future (controllable).

If your desire is to understand what economics is really all about, we have to start with the theories first and all the graphs and numbers will follow.  We have to know first the psyche of an economist.  We have to know economics at its very core – the basic concepts that you internalize and grasp in order to move on to more advanced topics of the discipline.

ETYMOLOGY

Economics is derived from the Greek word oikonomos.  Oikos means household and nomos means manager or steward. It simply means household management.

Textbook definition of economics is the science of allocating limited resources.

How can we connect the etymology of economics to its definition? We can start by not taking the etymology too literally.  A household can be applied to almost every situation.  A business can be a household (the CEO is the overall household manager).  A government can be a household too (the president is the overall household manager).  A situation can also be considered a household (you are the household manager).

What are the things that should be present in order for economics to exist?  Let us ponder on the following items:

CHOICE

To simplify further, economics is the science of “choice”.  Whenever you are about to make a choice between two or more items, economics exists.  Making a choice means that there is scarcity or limitation.  Whenever there is scarcity or limitation, there is economics.

Refusing to make a choice is also a choice because you either have to choose or not.  There is nothing in between. Therefore economics still exists even if you do not make a choice.

SCARCITY

Imagine this – it is lunch time, you are hungry. Just outside your office lies a Mc Donald’s and a Jollibee.  Which one would you choose? Before you choose, you check if you have money inside your wallet.  Economics is already at play in this scenario.  The money in your wallet is a perfect example of a limited resource.

There is no such thing as unlimited money because you are not the central bank and for the reason that your wallet can only hold so much money.

Your appetite is also limited.  You can only eat so much. Economics is still at play when you choose from a menu until you sit down and it the food you chose.

TRADE-OFFS

In every choice you make, you always forgo something. That’s where the concept of trade-off lies.  If you are to choose between to ride a train or ride a bus, you have to take one and forgo the other.

A classic case would be spending.  If you spend everything now, tomorrow will be a different story.

There is always a trade-off in economics.

MAN IS RATIONAL

In economics, man is a rational being.  Meaning, a man makes logical choices.  If a man wants a house, but buys a car for no valid reason, then he is not acting rationally.  In economics, a man acts what is expected of him – to be logical.

If a man has to choose between two alternatives, it is only logical that he choose the better one.  Man always chooses the option that would give him maximum utility (or in layman’s term – happiness).

MAN IS MONOCENTRIC

Why do people make choices?  It is because man wants to satisfy his wants and needs in the best possible way.  If a hungry man is choosing between Mc Donald’s and Jollibee, his agenda is to satisfy his hunger and not someone else’s; and he wants to satisfy it by choosing the best item in the menu, according to his appetite, taste, and budget.

If we make decisions such as getting a job, pursue education, our real goal is to satisfy our wants and needs.  A person needs to get a job because if he doesn’t, he will end up hungry, so he gets a job to avoid such scenario.

In economics, it is always about man choosing the best thing that would give him happiness (utility) to the fullest.  The end goal is what will satisfy the “self”, hence the term “monocentric”.

OPPORTUNITY COST

In every choice you make, there is an equivalent opportunity cost that is lost.  This is similar to trade-off, but opportunity cost looks into the “how much” of the trade-off concept.  The cost may not be monetary by nature, but for simplicity, you may think of it as monetary.

If you are choosing between a burger that cost P80 and a hotdog that costs the same but with free soda that could have cost you P20, the opportunity cost is P20 if you choose the burger (not taking into consideration your preference of food).

We may not have achieved yet how to understand economic jargons after reading this, but internalizing the principles mentioned above are the pre-requisites to it.  Whenever you make a choice, from now on, think of the trade-offs, opportunity costs related to it.  Reflect on your inner motives – why are you making a choice in the first place?  Ask yourself – do I make rational choices?   Take your time to ponder these simple but thought-provoking concepts of economics, and later on, you will find yourself ready to move on to the next level.