Economics in Everyday Life.

Written By Naitik Shah

The sky was dark, the street looked familiar but I couldn’t recall the name. The sound of rain was the only sign of life on this lonely night. I wondered what it was that brought me to this deserted place. Suddenly, the door in front of me swung open and I heard a loud screech. I thought to myself, “I have heard this sound before, where was it? Why can’t I remember?” and then it dawned on me, “Oh my god! It’s my alarm; I have to go for the economics class. I am late!”

I am sure many of you must’ve had similar experience, while here at LSE. To tell you the truth, this is what I hate the most about my student life. Having to wake up at seven am each morning, all I can do while lying there in bed is cook up reasons for not getting out of the bed. Most of the days, these reasons elude me and I end up at the eight o’ clock lecture, however on some lucky days I do cook up a good reason and end up sleeping in. You maybe wondering what does this have to do with economics; actually everything.

Economics is the study of how individual, faced with unlimited wants and limited resources maximize their utility, which in essence boils down to choosing between various alternatives. We experience this everyday, whether it is deciding between attending the morning class versus getting some more sleep or going to that party on the weekend and getting drunk versus staying up all night to study for the approaching exams.

So one might ask how does one bargain over these wants? The answer is simple, every choice that we make has a cost and some benefit associated with it. And we simply choose those actions whose additional benefit exceeds the additional cost incurred to undertake those actions. However, you may now ask how do we calculate the cost of two different things like studying and sleeping. The answer in this case is not that simple.

Every individual has a set of beliefs, ideals, preferences and goals in life; these are what make them unique, and also form the basis for our cost/ benefit analysis. Depending on what we value more we make our choices. Let’s take the example of choosing between sleeping in or attending the morning class. The cost analysis here is simple; the cost of going to class is forgoing your sleep and dream, of course if it’s a nightmare then the cost ends up being zero. On the other hand the benefit is attending the lecture and learning something, which in turn would mean you get a good grade. Thus, if you value getting good grades over sleep and your dream then you would choose to go to class. On the other hand if you know that the professor is simply going to read the handouts he has already put online, then the additional benefit of attending the class is reduced greatly. As a result, you get to sleep in just like me, on those lucky days, when I knew that the professor was just going to repeat what he had done in class and I was able to sleep in.

On that note, let me give you a couple of examples from everyday life to reinforce the idea. Choosing to work part time is another good example. Here the cost is the time spent away from studying, which I guess not a lot of you would look at as a cost, however the benefit is the extra money you make. Similarly, choosing what to during the Easter break can be seen as a cost benefit analysis. It’s a choice between studying for the impeding exams or enjoying your time off.

Before I end this discussion let me point out another interesting feature of this cost - benefit analysis, which I am sure you must’ve guessed by now; the value of cost and benefit changes depending on the circumstances facing a person. Let's analyze the case of procrastination to get a better understanding of this.

Let's say it’s the first week of class, you have just attended the first lecture and the professor informed you about the exam that is going to take place at the end of 10th week. At this point you are least worried about studying for it. The benefit of starting preparation are minimal as there is a high probability that you might forget what you studied before the exams, besides there’s a lot of time for you to prepare. On the other hand, the cost is too high as you would have to forgo all the fun you plan to do like joining different societies, going to the fresher bash, etc. With each passing day the benefit of studying increases. If you don’t study you could fail and then end up disappointing yourself as well as ruining your chances of getting a good job; the cost on the other hand stay the same. At some point in time the benefit would exceed the cost and you will stop procrastinating and start studying.

Thus the next time you are faced with a decision, think about what you have learned in economics and apply it to reap the benefits of your education.