Most of us didn’t really like economics as a subject back then in secondary school. Now we’ve grown older and we’ve started taking big responsibilities that are naturally inherent, and thus, pulls the balance of our financial stability.Most of us didn’t really like economics as a subject back then in secondary school. Now we’ve grown older and we’ve started taking big responsibilities that are naturally inherent, and thus, pulls the balance of our financial stability.
A few weeks ago, I was very eager to read a book. So I decided to pick one from my dusty bookshelf where I kept all the books I used in secondary school. While trying to pick up a book in my stacked bookshelf, I came into contact with the economics textbook I used in senior secondary school which I decided to read.
While I was going through the textbook, I read the chapter that talked about the basic concepts of economics. I came to realize that these concepts play a big role in our day-to-day activities from our spendings to our objectives, decision making, and even our well-being.
Okay, let’s go a little bit deeper. Do you still remember the most accepted definition of economics? I trust you wouldn’t, haha.
Professor Lionel Robbins defined economics
“as the science which studies human behaviours as a relationship between ends and scarce means which have alternative uses”.
Now you’re wondering what these concepts are and how they have a thing to do with your daily spendings. Personally, I grouped them into 2 categories which are the individual concepts and general concepts.
Individual concepts are wants, opportunity cost, the scale of preference, and wealth. General concepts are resources, scarcity, demand and supply. At times, Individuals, businesses, and governments use both categories to solve economic problems. These concepts work hand in hand.
Let’s talk about the individual concepts which is very much concerned with you and how you can channel them to be better at your financial stability.
A very important financial skill to learn is to be able to differentiate between wants and needs. Wants refer to the desires or wishes of an individual to possess goods and services which gives him maximum satisfaction. We all know what needs are.
You see, wants are numerous, infinite, endless, and insatiable. A man’s mind is so built that it is never satisfied. When a particular want is satisfied, other wants come up just like how the sun rises daily.
To be more financially stable, you need to focus more on your needs. It’s great to desire something and go for it, but don’t get that thing when you haven’t finished satisfying your needs.
Don’t live a champagne lifestyle on a Coca-Cola budget.
At times, wants can serve as alternatives for needs. When you get thirsty, you obviously want to have water. If you can’t get water, you could get a soda, tea, coffee, yoghurt, or milk. The final choice depends on you and the money at your disposal.
If you buy things you don’t need, soon you will have to sell things you really need.
Opportunity Cost — The road not taken
This concept is described as the sacrifice one takes in making a choice among competing wants. In other words, it is what you must forgo to get something.
For every financial choice you make, there is always a benefit and drawback. For example, let’s say you’re in a circumstance to choose between saving 100 bucks or buying a tray of pizza. If you choose the pizza, you’d likely have a nice meal, full energy, and your belly filled.
If you decide to save the 100 bucks, you’d likely starve and get a little bit weak, but you get to earn a couple of interest on the 100 bucks. Therefore, you get to have more money in the nearest future. Either way, you stand to gain or lose something.
When people are more cautious about the purchases they make, they will always look at their savings account and check their balance before spending money. These days, people don’t think about the things that they must give up when they make financial decisions.
Never, ever, spend money blindly.
There is a cost of every financial decision you make.
Scale Of Preference
“Scale of preference” is a common economic term that refers to the importance that an individual places on certain needs and wants. This is where needs and wants get aligned with each other based on the level of importance.
These needs and wants are arranged in order of importance whereby the most pressing items rank highest on the list while the least pressing items rank lower
For example, if Johnson has 650 bucks and he has to buy these items. He’ll have to go for the first three on the list. Later on, when he has more bucks he can go for the last two.
Before you purchase a couple of items, always pen them down and purchase the most important and pressing items at the moment. Spend more wisely.
The scale of preference helps you make rational financial decisions that ensure maximization of your satisfaction to some extent because you’ll be able to satisfy all your important needs at the moment. Start outlining your scale of preference today.
In economics, wealth refers to income-producing assets like stocks, shares, skills, and equipments owned by an individual or firm at a particular time which have exchanged value (Liquidity). It is also the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions.
Economically, wealth is any unconsumed asset (an apple picked but not yet eaten) valued by its owner. As long as you possess something that has value, it is wealth. I really don’t need to explain why wealth is good for you, yeah. Everyone wants wealth. At the same time, wealth paradoxically has something to do with power.
Adam Smith defined economics as:
An enquiry into nature and causes of the wealth of nations.
So the big question is “how do you procure wealth?”
1. Change the way you think about money.
2. Understand the power of small amounts.
3. Avoid a lavish lifestyle.
4. Building substantial wealth takes time.
5. For each penny you save, you’re buying yourself freedom.
6. Study successful and wealthy people.
7. Pay off debts, save, and invest.
8. Invest in yourself.
Other concepts of economics which are scarcity, resources, demand, and supply are general concepts used mostly by businesses and organizations.
On the contrary, if you run a business, firm, or you produce goods and provide services, you should always apply the laws of demand and supply which are:
1. The higher the price, the lower the quantity demanded.
2. The higher the price, the higher the quantity supplied.
3. The equilibrium price is that which equates supply with demand.
4. An increase in demand causes the price to rise and supply to increase.
5. An increase in supply lowers the price and causes demand to expand.
My final take
- Make money, save money, invest money.
- Prioritize your needs before wants.
- Make better financial choices.
- Learn to build wealth.
- Invest Invest Invest.
Applying economics to your day-to-day spendings is very important for proper financial stability.
Start applying economics today.