importance of economics in daily life essay

Essay on Economics Importance In Daily Life

Students are often asked to write an essay on Economics Importance In Daily Life in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Economics Importance In Daily Life

Understanding economics.

Economics is a subject that studies how people, businesses, and governments make choices about how to use resources. It’s like a guidebook for making decisions. It’s not just about money, but also about time, effort, and what you give up when you make a choice.

Economics in Daily Life

Importance of economics.

Understanding economics helps us make better choices. It helps us decide how to use our resources wisely. It also helps us understand the world around us. For example, why are some things more expensive than others? Economics can help answer that.

Economics and Future

Economics also helps us plan for the future. It helps us understand how to save and invest money. It helps us understand how the economy works. This knowledge can help us make smart choices about jobs, education, and more.

250 Words Essay on Economics Importance In Daily Life

What is economics, personal economics.

Every day, we make decisions about what to buy, where to buy, and how much to spend. We also think about saving money for future needs. This is personal economics. We have to choose how to use our money wisely.

Economics in Business

Businesses also use economics. They decide what products to make, how many to produce, and at what price to sell them. They look at the demand for their products and the cost of making them. This helps them make profits and stay in business.

Economics in Society

Economics also plays a big role in society. It helps governments decide how to use their money. They have to choose what services to provide, like schools, hospitals, and roads. They also have to decide how to pay for these services, usually through taxes.

So, economics is very important in our daily lives. It helps us, businesses, and governments make important decisions. Understanding economics can help us make better choices and understand the world around us. So, even if you’re a student, it’s never too early to start learning about economics!

500 Words Essay on Economics Importance In Daily Life

Economics is a subject that helps us understand how the world works. It studies how people, businesses, and governments make choices about how to use resources. It’s like a guidebook that helps us make smart decisions about money and resources.

Economics in our Daily Lives

Importance of economics in spending.

Economics helps us make good decisions about spending. It teaches us to think about the value of things. For example, if you have only $10 and you want to buy a book that costs $15, economics can help you decide if it’s worth saving up for the book or if you should spend your money on something else.

Economics and Saving

Economics doesn’t just help us with spending, but with saving too. It can help us understand why it’s important to save money for the future. For example, if you save a part of your pocket money every week, you could buy a more expensive toy or game later. This is called delayed gratification, a key concept in economics.

Economics in Resource Allocation

Economics also helps us understand how to use resources wisely. Resources can be anything from time to natural resources like water and trees. For example, if we understand that water is a limited resource, we will be more careful about not wasting it. This is an economic principle called scarcity.

Economics and Jobs

In conclusion, economics is a part of our daily life. It helps us make smart choices about spending and saving. It teaches us to use resources wisely and understand the world of work. Just like a map helps us find our way, economics helps us navigate through life. So, even though it might seem like a tough subject, it’s worth learning because it’s so useful in our daily lives.

Apart from these, you can look at all the essays by clicking here .

Happy studying!

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The power of economics to explain and shape the world

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Photo of Abijit Banerjee and Esther Duflo standing side-by-side against a blurred background

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Nobel Prize-winning economist Esther Duflo sympathizes with students who have no interest in her field. She was such a student herself — until an undergraduate research post gave her the chance to learn first-hand that economists address many of the major issues facing human and planetary well-being. “Most people have a wrong view of what economics is. They just see economists on television discussing what’s going to happen to the stock market,” says Duflo, the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics. “But what people do in the field is very broad. Economists grapple with the real world and with the complexity that goes with it.”

That’s why this year Duflo has teamed up with Professor Abhijit Banerjee to offer 14.009 (Economics and Society’s Greatest Problems), a first-year discovery subject — a class type designed to give undergraduates a low-pressure, high-impact way to explore a field. In this case, they are exploring the range of issues that economists engage with every day: the economic dimensions of climate change, international trade, racism, justice, education, poverty, health care, social preferences, and economic growth are just a few of the topics the class covers. “We think it’s pretty important that the first exposure to economics is via issues,” Duflo says. “If you first get exposed to economics via models, these models necessarily have to be very simplified, and then students get the idea that economics is a simplistic view of the world that can’t explain much.” Arguably, Duflo and Banerjee have been disproving that view throughout their careers. In 2003, the pair founded MIT’s Abdul Latif Jameel Poverty Action Lab, a leading antipoverty research network that provides scientific evidence on what methods actually work to alleviate poverty — which enables governments and nongovernmental organizations to implement truly effective programs and social policies. And, in 2019 they won the Nobel Prize in economics (together with Michael Kremer of the University of Chicago) for their innovative work applying laboratory-style randomized, controlled trials to research a wide range of topics implicated in global poverty. “Super cool”

First-year Jean Billa, one of the students in 14.009, says, “Economics isn’t just about how money flows, but about how people react to certain events. That was an interesting discovery for me.”

It’s also precisely the lesson Banerjee and Duflo hoped students would take away from 14.009, a class that centers on weekly in-person discussions of the professors’ recorded lectures — many of which align with chapters in Banerjee and Duflo’s book “Good Economics for Hard Times” (Public Affairs, 2019). Classes typically start with a poll in which the roughly 100 enrolled students can register their views on that week’s topic. Then, students get to discuss the issue, says senior Dina Atia, teaching assistant for the class. Noting that she finds it “super cool” that Nobelists are teaching MIT’s first-year students, Atia points out that both Duflo and Banerjee have also made themselves available to chat with students after class. “They’re definitely extending themselves,” she says. “We want the students to get excited about economics so they want to know more,” says Banerjee, the Ford Foundation International Professor of Economics, “because this is a field that can help us address some of the biggest problems society faces.” Using natural experiments to test theories

Early in the term, for example, the topic was migration. In the lecture, Duflo points out that migration policies are often impacted by the fear that unskilled migrants will overwhelm a region, taking jobs from residents and demanding social services. Yet, migrant flows in normal years represent just 3 percent of the world population. “There is no flood. There is no vast movement of migrants,” she says. Duflo then explains that economists were able to learn a lot about migration thanks to a “natural experiment,” the Mariel boat lift. This 1980 event brought roughly 125,000 unskilled Cubans to Florida over a matter a months, enabling economists to study the impacts of a sudden wave of migration. Duflo says a look at real wages before and after the migration showed no significant impacts. “It was interesting to see that most theories about immigrants were not justified,” Billa says. “That was a real-life situation, and the results showed that even a massive wave of immigration didn’t change work in the city [Miami].”

Question assumptions, find the facts in data Since this is a broad survey course, there is always more to unpack. The goal, faculty say, is simply to help students understand the power of economics to explain and shape the world. “We are going so fast from topic to topic, I don’t expect them to retain all the information,” Duflo says. Instead, students are expected to gain an appreciation for a way of thinking. “Economics is about questioning everything — questioning assumptions you don’t even know are assumptions and being sophisticated about looking at data to uncover the facts.” To add impact, Duflo says she and Banerjee tie lessons to current events and dive more deeply into a few economic studies. One class, for example, focused on the unequal burden the Covid-19 pandemic has placed on different demographic groups and referenced research by Harvard University professor Marcella Alsan, who won a MacArthur Fellowship this fall for her work studying the impact of racism on health disparities.

Duflo also revealed that at the beginning of the pandemic, she suspected that mistrust of the health-care system could prevent Black Americans from taking certain measures to protect themselves from the virus. What she discovered when she researched the topic, however, was that political considerations outweighed racial influences as a predictor of behavior. “The lesson for you is, it’s good to question your assumptions,” she told the class. “Students should ideally understand, by the end of class, why it’s important to ask questions and what they can teach us about the effectiveness of policy and economic theory,” Banerjee says. “We want people to discover the range of economics and to understand how economists look at problems.”

Story by MIT SHASS Communications Editorial and design director: Emily Hiestand Senior writer: Kathryn O'Neill

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Prof. Esther Duflo will present her research on poverty reduction and her “proposal for a global minimum tax on billionaires and increased corporate levies to G-20 finance chiefs,” reports Andrew Rosati for Bloomberg. “The plan calls for redistributing the revenues to low- and middle-income nations to compensate for lives lost due to a warming planet,” writes Rosati. “It also adds to growing calls to raise taxes on the world’s wealthiest to help its most needy.”

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Saturday, June 17, 2017

The importance of economics.

What to produce? - Is it worth spending more on health care?
How to produce? - Should we leave it to market forces or implement government regulations.
For whom to produce? - How should we distribute resources, should we place higher income tax on the wealthiest in society?

Mass unemployment in the 1930s

Policies to reduce unemployment
Policies to reduce inflation

Market failure - stuck in traffic jam, breathing car fumes

The over production of negative externalities (e.g. pollution/congestion)
The underproduction of goods with positive externalities (e.g. education, health care, public transport).
Non-provision of Public Goods - (national defence, law and order)
Tax negative externalities
Subsidise public services like health care and education.
Carbon Tax - should we implement a carbon tax to reduce global warming?
Should we tax fatty foods?
Efficiency v equality
GDP and Happiness
Economics - The Dismal Science
How to deal/combat global warming?
Does globalisation help or hinder developing countries?
How to live in a society without oil?

15 comments:

a big hand of appluse for the writer of da topic who made it so easy to understand and absorbant. Mrs.Afaque...

this helped me a lot in my school project.a bit problem is there a filipino version?haha!

I really like the blog because of easy and focused approach that writer has used in simple and less words. Useful for those who just want a overview about economics.

very helpful and briefly detailed..thank you, writer.

this will help me 4 sure.. jejeje

your notes really helped me alot. i have my exam tomorrow and and i easily mugged up these notes.

waw! So nice...u realy helped me, thnx alot

thanks a lot to the writer...you just saved me from my prof's course.

Please elaborate on GDP Vs. Happiness?

Economics helps me to manage my money well when in school. thank you writer!

I will like to know how an economist is useful in an electoral decision or organization

I love the blog because the writer explained the importance of economics in simple terms and it helped me a lot with my school assignment

A definition of what an economy means is helpful in understanding the importance of economic systems. The economy is a structured system that uses production, distribution, and services to create a stable environment. Therefore, an economic system is the production, consumption of goods and services with a set of institutions and social relations to create a balanced society. There are a few different types of economic systems such as capitalist, social list, mixed economies and communism. Economic systems do not have to be on a global scale or even a national scale. For example, economic systems such as distributism, the Japanese system, social market economy and Georgism are some of the available options out there. These systems may be state or private. A few are cooperative ownerships. A mixed economy is considered one with a mix of private activity and state planning. The best gauge for the importance of economic systems is balance. The world requires a balance that will ensure the survival of the system. For example, the human race has to find balance with food, shelter, water, and even income in order to survive. Income is necessary in order to buy shelter, food, and other necessities of life. Though money did not exist in the past, we have an economic system that demands income be included in our survival. The UK has a capitalist system which the government maintains order to sustain life in the UK. Since society can be part of economic systems, it is also an important factor in people getting along in a balance of nature. Humans are social by nature therefore an economy that promotes this social interaction will also increase the effectiveness of the economic system in place and the balance of one's life.

thanks man! this helps me for my report tomorrow..

Very easy to understand Thanks

The importance of economics

Readers Question: What is the importance of economics?

Economics is concerned with the optimal distribution of resources in society. The subject involves

Understanding what happens in markets and the macroeconomy.
Examining statistics about the state of the economy and explaining their significance
Understanding different policy options and evaluating their likely outcomes.

Examples of the importance of economics

Dealing with a shortage of raw materials. Economics provides a mechanism for looking at possible consequences as we run short of raw materials such as gas and oil. See also: Effects of a world without oil.
How to distribute resources in society. To what extent should we redistribute income in society? Is inequality necessary to create economic incentives or does inequality create unnecessary economic and social problems?
To what extent should the government intervene in the economy? A critical divide in economics is the extent to which the government should intervene in the economy. Free market economists, like Hayek and Friedman, argue for limited government intervention and free markets. Other economists, like Stiglitz or Krugman, argue government intervention can overcome inequality and the underprovision of public goods. For example – should the government provide health care free at the point of use or is it more efficient to encourage private health care? See also: To what extent should the government intervene in the economy?
The principle of opportunity cost. Politicians win elections by promising more spending and cutting taxes. This is because lower taxes and more spending is what voters want to hear. However, an economist will be aware that everything has an opportunity cost. Spend more on subsidising free university education, and it means higher taxes and lower spending elsewhere. Giving students £4,000 a year to spend at university may be a noble ideal. But, is it the best use of public money? Are there better uses of money, such as spending on primary education? See: Opportunity Cost
Social efficiency. The free market leads to countless examples of market failure. I feel one of the best uses of economics is to provide solutions to overcoming market failure. For example, driving into the centre of town creates negative externalities such as pollution and congestion. There is overconsumption. An economist can suggest a tax on driving into towns to internalise the externality. Of course, new taxes are not popular, but, it might provide a better solution for society. You may not want to pay £10 a week to drive into a city centre. But, if it saved you two hours of sitting in a jam, then maybe you would be much happier to pay it.
Knowledge and understanding. One of the principal jobs for economists is to understand what is happening in the economy and investigate reasons for poverty, unemployment and low economic growth. For example, in a political debate such as – Should, the UK leave the EU? There are many emotional arguments made about immigration. Economic studies can try and evaluate the costs and benefits of free movement of labour. Economic studies can try to examine the economic effects of immigration . This can help people make a decision about political issues.

How to deal with an economic crisis. In the 1930s, the Wall Street Crash precipitated a significant rise in unemployment. There was a debate on how to respond. Many western governments increased taxes, tariffs and benefits. This response caused John M. Keynes to develop a new branch of economics – focused on dealing with a persistent recession.
Evaluation. Economics is not a definitive science like Maths. Because of many unknown variables, it is impossible to be definitive about outcomes, but a good economist will be aware the result depends on different variables, and there are different potential outcomes. This should help avoid an overly ideological approach. For example, a government may have the philosophy ‘free markets are always best’, but an economist would be aware of a more nuanced view that in some markets, like health care, transport, government intervention can overcome market failure and improve welfare. But, at the same time, it doesn’t mean state intervention is always best.
Behavioural economics Why do people behave as they do? Can governments subtly nudge people into better behaviour, e.g. banning cigarette advertising? Are we subject to bias and irrational behaviour? For example, can we be sucked along by a bubble and lose a fortune on the stock market? Behavioural economics examines the reasons why we make decisions. See: Behavioural economics .
Applying economics in everyday life . Modern economists have examined economic forces behind everyday social issues. For example, Gary Becker argued that most crime could be explained by economic costs and benefits. See: Applying economics in everyday life .

Limitations of Economics

Does economics place too much value on rationality, utility maximisation and profit maximisation? That is the work of behavioural economics who are more critical of the limitations of the traditional economic theory.

Does GDP measure living standards?

58 thoughts on “The importance of economics”

It reals helps

Yeah that’s right good job I agree with you about opportunity cost of politicians…🤣🤣🤣

Economic is the social science to a group of social science to other subjects in the same group are religious studies and it really good to individuals needs 👍👍👍👍😊😊😊

Economics is the study of manage individuals, groups, and nations’ unlimited demand and wants with limited resources. The study of economics not only expands the skills required to understand multifaceted markets but also comes left with sturdy analytical and problem–solving skills and with additional business expertise necessary to be successful in the professional globe village even though Economics is useful for professionals in all industries even not only in business

Dear honourable sir I need economics support to establish an new business which can stand me an happy life with humanity and be upon to helping others to establish their life with an modernity in future

Yes health crisis is common problem in our life everyday,I have been trying personally to do an new plan that’s save people’s health riscks,for this people’s need to understand what is health? health mean a human body and minds protect from disease,what is disseas? disease is one kinds of effect in our health,by various virus,and disseas,how we protect us,we protect us from disseas by our understanding what feeling in our body health,and what it’s harm,what kinds of disseas?then we personally try to stop this disseas,then a man can safe his/her health.

I have small amount of money with me but I fail to identify business to start please I need some help coz I don’t know what to do next since there is risks and uncertainty in business

start selling food if you can cook its pretty low risk if you get into events

Very good to to analyze this importance of economic

Comments are closed.

The Classroom | Empowering Students in Their College Journey

How Does Economics Affect Our Daily Lives?

What Are the Causes of Economic Decline?

While the word "economics" may conjure up a view of Wall Street trading or a college course, it is actually a term that relates to everyday life in many ways. Economics is a social science that deals with the life-cycle of goods and services. It is a study of how innovation and finance revolve around the basic human needs and wants in order to provide products and services to the public. Understanding how economics relates to society is critical to business success but also relates everyday life. Consumers confident in the economy are more likely to spend while a shaky economy may be matched with consumers less willing to spend money. Taking a closer look at supply and cost, consumer loans, consumer confidence and debt and spending helps analyze the overall economic climate and outlook.

Supply and Cost

Economics has an enormous effect on the daily lives and wallets of all people, even if they aren't actually involved in economic studies. The principles of supply and demand play out every day for people making purchasing decisions on goods and services as well as in them keeping or finding employment. Changes in circumstances, regulations or government mandates on any part of an industry's economic structure can create a ripple effect of price changes through multiple industries to the end consumer. For example, if regulations change distribution channels, that can increase the cost of producing goods which in turn, forces retailers to raise the price of goods to still have an economic profit.

Consumer Confidence

When the consumers' confidence in the economy is low, they restrain spending, starting with dining out and going to the movies. These industries have wage workers that lose income when hours are cut due to reduced business. Soon, everyone feels the pinch perpetuated by fewer open retail check-out lines to fewer police on the streets. The Gallup Consumer Confidence poll measures ongoing consumer economic confidence by asking Americans to answer questions on their view of current economic conditions and if they think conditions are improving or declining from a point in the recent past.

Debt and Spending

CNN Money reports that consumer spending fuels two-thirds of the United States economic activity, much of which was based on credit prior to 2008. The 2008 to 2009 financial collapse led banks to tighten consumer lending, and consumers began paying down debt rather then spending as usual. Reducing personal debt is good on the individual level, but this reaction also kept employment in a slump and reduced the disposable income of households and individuals. When individuals see the economy as being stronger, they are more apt to spend money in stores and on larger purchases like homes or vehicles. Debt often comes with those purchases beyond day-to-day spending. When consumers return to feeling the economy is rebounding, they are apt to take on more debt with less fear of an economic collapse.

Cons of Supply Side Economics

Managerial Economics Topics

Negative Effects of Tariffs

Macroeconomic Paper Research Topics

Topics for A Human Relations Research Paper

Difference Between Deflation, Recession & Depression

How to Calculate Total Cost in Economics

Advantages & Disadvantages on College Students With Credit Cards

CNNMoney: Consumer Confidence Ticks up in October (2010)
RasmussenReports: Discover ® Consumer Spending Monitor (SM) Rises 1.8 Points in October
BusinessInsider: The New American Consumer is Terrified of Debt Even as the Economy Grows
Economics Help: Applying Economics in Everyday Life
Gallup: U.S. Economic Confidence Index

Cynthia Clark began writing professionally in 2004. Her work experience includes all areas of small-business development, real-estate investments, home remodeling and Web development. Clark is skilled in a number of design disciplines from digital graphics to interior design. Her diverse background and commonsense problem-solving skills allow her to tackle a variety of topics as an online writer.

1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

Discuss the importance of studying economics
Explain the relationship between production and division of labor
Evaluate the significance of scarcity

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 expendable hours in the day to earn income to acquire goods and services, for leisure time, or for sleep. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2015 the labor force in the United States contained over 158 million workers, according to the U.S. Bureau of Labor Statistics. The total land area was 3,794,101 square miles. While these are certainly large numbers, they are not infinite. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

Introduction to FRED

Data is very important in economics because it describes and measures the issues and problems that economics seek to understand. A variety of government agencies publish economic and social data. For this course, we will generally use data from the St. Louis Federal Reserve Bank's FRED database. FRED is very user friendly. It allows you to display data in tables or charts, and you can easily download it into spreadsheet form if you want to use the data for other purposes. The FRED website includes data on nearly 400,000 domestic and international variables over time, in the following broad categories:

Money, Banking & Finance
Population, Employment, & Labor Markets (including Income Distribution)
National Accounts (Gross Domestic Product & its components), Flow of Funds, and International Accounts
Production & Business Activity (including Business Cycles)
Prices & Inflation (including the Consumer Price Index, the Producer Price Index, and the Employment Cost Index)
International Data from other nations
U.S. Regional Data
Academic Data (including Penn World Tables & NBER Macrohistory database)

For more information about how to use FRED, see the variety of videos on YouTube starting with this introduction.

If you still do not believe that scarcity is a problem, consider the following: Does everyone require food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless (for example, those who call park benches their beds, as Figure 1.2 shows), and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for pay. If you do not, someone else does on your behalf. Yet most of us never have enough income to buy all the things we want. This is because of scarcity. So how do we solve it?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. How do we use our limited resources the best way possible, that is, to obtain the most goods and services we can? There are a couple of options. First, we could each produce everything we each consume. Alternatively, we could each produce some of what we want to consume, and “trade” for the rest of what we want. Let’s explore these options. Why do we not each just produce all of the things we consume? Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things, but it is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith ( Figure 1.3 ) in his book, The Wealth of Nations .

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the concept of division of labor , which means that the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person.

To illustrate division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that different people performed—all for a pin, believe it or not!

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located. A complex business like a large manufacturing factory, such as the shoe factory ( Figure 1.4 ), or a hospital can have hundreds of job classifications.

Why the Division of Labor Increases Production

When we divide and subdivide the tasks involved with producing a good or service, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith noticed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to complete two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, geography affects specialization. For example, it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more effective than if they produce a combination of things, some of which they are good at and some of which they are not.

Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better.

A similar pattern often operates within businesses. In many cases, a business that focuses on one or a few products (sometimes called its “ core competency ”) is more successful than firms that try to make a wide range of products.

Third, specialization allows businesses to take advantage of economies of scale , which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. For example, if a factory produces only 100 cars per year, each car will be quite expensive to make on average. However, if a factory produces 50,000 cars each year, then it can set up an assembly line with huge machines and workers performing specialized tasks, and the average cost of production per car will be lower. The ultimate result of workers who can focus on their preferences and talents, learn to do their specialized jobs better, and work in larger organizations is that society as a whole can produce and consume far more than if each person tried to produce all of their own goods and services. The division and specialization of labor has been a force against the problem of scarcity.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy an iPod or MP3 player, download the music, and listen. You do not have to know anything about artificial fibers or the construction of sewing machines if you need a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that you have an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to memorize, although there are plenty of important concepts to learn. Instead, think of economics as a collection of questions to answer or puzzles to work. Most importantly, economics provides the tools to solve those puzzles.

Consider the complex and critical issue of education barriers on national and regional levels, which affect millions of people and result in widespread poverty and inequality. Governments, aid organizations, and wealthy individuals spend billions of dollars each year trying to address these issues. Nations announce the revitalization of their education programs; tech companies donate devices and infrastructure, and celebrities and charities build schools and sponsor students. Yet the problems remain, sometimes almost as pronounced as they were before the intervention. Why is that the case? In 2019, three economists—Esther Duflo, Abhijit Banerjee, and Michael Kremer—were awarded the Nobel Prize for their work to answer those questions. They worked diligently to break the widespread problems into smaller pieces, and experimented with small interventions to test success. The award citation credited their work with giving the world better tools and information to address poverty and improve education. Esther Duflo, who is the youngest person and second woman to win the Nobel Prize in Economics, said, "We believed that like the war on cancer, the war on poverty was not going to be won in one major battle, but in a series of small triumphs. . . . This work and the culture of learning that it fostered in governments has led to real improvement in the lives of hundreds of millions of poor people.”

As you can see, economics affects far more than business. For example:

Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues? Did you know?
A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

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Topic 1: Introductory Concepts and Models

1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

Discuss the importance of studying economics
Explain the relationship between production and division of labor
Evaluate the significance of scarcity

At its core, Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time – everyone, rich or poor, has just 24 hours in the day to try to acquire the goods they want. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2016, the labor force in Canada contained 19.4 million workers, according to Statistics Canada. The total area of the Canada is 9.99 million square kilometres. These are large numbers for such crucial resources, however, they are limited. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

The image is a photograph of two people who are homeless and sleeping on public city benches.

If you still do not believe that scarcity is a problem, consider the following: Does everyone need food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless, and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for a wage. Or if you do not, someone else does on your behalf. Yet most of us never have enough to buy all the things we want. This is because of scarcity. So how do we solve the problem of scarcity?

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defence or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. So why do we not each just produce all of the things we consume? The simple answer is most of us do not know how, but that is not the main reason. Think back to pioneer days, when individuals knew how to do many more practical tasks than we do today, from building their homes, to growing crops, to hunting for food, or repairing their equipment. Most of us do not know how to do all—or any—of those things. It is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith in his book, The Wealth of Nations (See Figure 2).

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the division of labor , which means that the way a good or service is produced is divided into a number of tasks that are performed by different workers, instead of all the tasks being done by the same person.

To illustrate the division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that were often done by different people—all for a pin!

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of serving meals into a range of jobs like top chef, sous chefs, kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located. A complex business like a large manufacturing factory, such as the shoe factory shown in Figure 3 can have hundreds of job classifications.

The image is a photograph of factory workers for a shoe company working separately on individualized tasks.

Why the Division of Labor Increases Production

When the tasks involved with producing a good or service are divided and subdivided, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith observed that one worker alone might make 20 pins in a day, but that a small business of 10 workers (some of whom would need to do two or three of the 18 tasks involved with pin-making), could make 48,000 pins in a day. How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons.

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later topics, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, specialization will be affected by geography—it is easier to be a wheat farmer in Saskatchewan than in British Columbia, but easier to run a tourist hotel in BC than in Saskatchewan. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more productive than if they produce a combination of things, some of which they are good at and some of which they are not.

Trade and Markets

However, specialization only makes sense if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy a phone, download the music and listen. You do not have to know anything about artificial fibers or the construction of sewing machines to wear a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that we have an overview of what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to be memorized, though there are plenty of important concepts to be learned. Instead, economics is better thought of as a collection of questions to be answered or puzzles to be worked out. Most important, economics provides the tools to work out those puzzles. If you have yet to be been bitten by the economics “bug,” here are some other reasons why you should study economics:

Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general.
A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

Economics seeks to understand and address the problem of scarcity, which is when human wants for goods and services exceed the available supply. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want. The division of labor allows individuals and firms to specialize and to produce more for several reasons: a) It allows the agents to focus on areas of advantage due to natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents to take advantage of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps you understand the major problems facing the world today, prepares you to be a good citizen, and helps you become a well-rounded thinker.

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1.1 What Is Economics, and Why Is It Important?

Learning objectives.

By the end of this section, you will be able to:

Discuss the importance of studying economics
Explain the relationship between production and division of labor
Evaluate the significance of scarcity

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources, such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 hours in the day to try to acquire the goods they want. At any point in time, there is only a finite amount of resources available.

Think about it this way: the total land area of the main Hawaiian islands is only 10,931 square miles. Because land and other natural resources are limited, so are the numbers of goods and services we can produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

If you still do not believe that scarcity is a problem, consider the following: Does everyone need food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In Hawaiʻi there are people who are hungry, homeless, and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity. Let’s delve into the concept of scarcity a little deeper, because it is crucial to understanding economics.

What is a good and what is a service?

Goods have a physical tangible presence, for example, a pizza or a scissors. Services have no physical tangible presence but have economic value (people are willing to pay to get this service). Examples of services include the delivery of a pizza or getting your hair cut.

Only around 20% of workers in the US work at jobs where they produce goods. The percentage is even smaller in Hawaiʻi: only 4% of workers in Hawaiʻi produce goods! What are the main services produced in Hawaiʻi and what are the main goods?

The Problem of Scarcity

Think about all the things you consume: food, shelter, clothing, transportation, healthcare, and entertainment. How do you acquire those items? You do not produce them yourself. You buy them. How do you afford the things you buy? You work for pay. Or if you do not, someone else does on your behalf. Yet most of us never have enough to buy all the things we want. This is because of scarcity. So how do we solve it?

Visit this website to read about how the United States is dealing with scarcity in resources.

Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation. Towns must choose whether to put more of the budget into police and fire protection or into the school system. Nations must decide whether to devote more funds to national defense or to protecting the environment. In most cases, there just isn’t enough money in the budget to do everything. So why do we not each just produce all of the things we consume? The simple answer is most of us do not know how, but that is not the main reason. (When you study economics, you will discover that the obvious choice is not always the right answer—or at least the complete answer. Studying economics teaches you to think in a different of way.) Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment. Most of us do not know how to do all—or any—of those things. It is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith in his book, The Wealth of Nations .

The Division of and Specialization of Labor

The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776. Many authors had written on economics in the centuries before Smith, but he was the first to address the subject in a comprehensive way. In the first chapter, Smith introduces the division of labor , which means that the way a good or service is produced is divided into a number of tasks that are performed by different workers, instead of all the tasks being done by the same person.

Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located (check out the video below). A complex business like a large manufacturing factory or a hospital can have hundreds of job classifications.

The Division of Labor at work at Marukame Udon in Waikiki:

Why the Division of Labor Increases Production

First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. (In later chapters, we will develop this idea by discussing comparative advantage .) People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, specialization will be affected by geography—it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota. If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more productive than if they produce a combination of things, some of which they are good at and some of which they are not.

Trade and Markets

Specialization only makes sense, though, if workers can use the pay they receive for doing their jobs to purchase the other goods and services that they need. In short, specialization requires trade.

You do not have to know anything about electronics or sound systems to play music—you just buy an iPod or MP3 player, download the music and listen. You do not have to know anything about artificial fibers or the construction of sewing machines if you need a jacket—you just buy the jacket and wear it. You do not need to know anything about internal combustion engines to operate a car—you just get in and drive. Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

Now that we have gotten an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to be memorized, though there are plenty of important concepts to be learned. Instead, economics is better thought of as a collection of questions to be answered or puzzles to be worked out. Most important, economics provides the tools to work out those puzzles. If you have yet to be been bitten by the economics “bug,” there are other reasons why you should study economics.

Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues involved? Did you know?
A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

Key Concepts and Summary

Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want. The division of labor allows individuals and firms to specialize and to produce more for several reasons: a) It allows the agents to focus on areas of advantage due to natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents to take advantage of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps you understand the major problems facing the world today, prepares you to be a good citizen, and helps you become a well-rounded thinker.

Self-Check Questions

What is scarcity? Can you think of two causes of scarcity?
Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?
A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?
A computer systems engineer could paint his house, but it makes more sense for him to hire a painter to do it. Explain why.

Review Questions

Give the three reasons that explain why the division of labor increases an economy’s level of production.
What are three reasons to study economics?

Critical Thinking Questions

Suppose you have a team of two workers: one is a baker and one is a chef. Explain why the kitchen can produce more meals in a given period of time if each worker specializes in what they do best than if each worker tries to do everything from appetizer to dessert.
Why would division of labor without trade not work?
Can you think of any examples of free goods, that is, goods or services that are not scarce?

Bureau of Labor Statistics, U.S. Department of Labor. 2015. “The Employment Situation—February 2015.” Accessed March 27, 2015. http://www.bls.gov/news.release/pdf/empsit.pdf.

Williamson, Lisa. “US Labor Market in 2012.” Bureau of Labor Statistics . Accessed December 1, 2013. http://www.bls.gov/opub/mlr/2013/03/art1full.pdf.

Answers for Self-Check Questions

Scarcity means human wants for goods and services exceed the available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.
100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.
She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than it what she could save growing her vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best (i.e. specialization of labor).
The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!

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ECONLOG POST

Nov 22 2023

Economics in Everyday Life

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By Kevin Corcoran, Nov 22 2023

There are many ways to learn the ideas of economics. One way is through the standard method – read textbooks or attend lectures where ideas are described. But economics is about human action – which means the lessons of economics can also be found in our own lives. Some people claim that basic econ is often counterintuitive, and it indeed may be to some or most people. But as I began to study economics many years ago, I found its lessons extremely intuitive, because the ideas being described were things I had witnessed or experienced throughout my life.

For example, I found it very easy to envision all the ways people adjust their behavior in response to taxes. I grew up in Washington state, very close to the border with Oregon. There were two big tax differences between those states. (Well, probably more than two, but there were two I cared about at that time.) Oregon had a state income tax, while Washington did not. And Washington had a state sales tax, while Oregon did not.

Both of those were often cited as factors in decisions people would make. As people started getting jobs, it was common to find opportunities that were similarly appealing and equidistant, some in Washington and some just over the river in Oregon. When that happened, people would heavily favor finding a job in Washington, because if you worked in Oregon you had to pay Oregon state income tax, even if you weren’t an Oregon resident. (But even though you were an Oregon taxpayer, you were unable to cast any votes in Oregon – taxation without representation!) But it didn’t work in the other direction – friends I had in Portland didn’t feel any extra incentive to find a Washington job, because even if they worked in Washington, they would still have to pay Oregon state income tax.

However, the sales tax difference made a much more frequent impact. Washington’s sales tax in those days was, if memory serves, around 7.7%. This made it very common for people in Washington to put a little extra effort into driving to Oregon to make a purchase, particularly if it was a large purchase. If you needed to buy a new TV or a new couch, why would you voluntarily choose to pay what amounted to an unnecessary 7.7% surcharge on top of your already expensive purchase? I’m sure that over the years, retailers along the border in Washington lost a considerable number of sales to retailers just along the Oregon border, precisely because people would adjust their behavior in response to taxes.

But at the same time, the sales tax issue wasn’t decisive . If you were going to buy a new TV for a thousand dollars, if often made sense to take the extra ten minutes to drive over the Columbia River and buy it in Oregon to save nearly eighty dollars in sales tax. But if you just needed to make a small purchase, the extra time and gas costs of the longer drive meant it wasn’t worth doing to avoid the 7.7% tax rate. And the further you lived from the Oregon border, the larger a purchase would have to be in order to make you willing to do the longer drive in order to save on sales tax. Though I didn’t know the term at the time, this showed me the importance of transaction costs in our decision making. The choice you will make will be in part influenced by the fact that the choice itself carries its own cost.

importance of economics in daily life essay

One other difference between Oregon and Washington gave me a healthy skepticism of “but it creates jobs!” as a justification for some program or regulation . While I lived in the area, and until very recently, it was illegal for you to pump your own gas in Oregon. By law, you would have to hand your cash or credit card to a gas station employee and have him pump your gas for you. I absolutely hated the experience, because it just slowed the whole process down. It was very common to get to a gas station with eight pumps and only two attendants and have to wait several minutes for one to work his way over to you, tell him you wanted to fill the tank, hand him your card, and have him start filling your tank. Meanwhile he’d wander off to another vehicle, your car would finish filling up, and you’d still be left waiting several more minutes before he got back and put the nozzle away and returned your credit card so you could be on your way. Nothing was more productive as a result of these jobs existing – the whole process just became slower and more time consuming. This made it very intuitive for me to see why economists focus on production, not employment. It’s not about how many people are doing stuff, what really matters is how much stuff gets done . Using more people to achieve the same level of production (or less) isn’t how progress is made.

What about you, EconLog readers? Are there any ideas in economics you learned about and immediately recognized from your own life experience? If so, drop some comments sharing what those ideas where, and where in life you saw them in action.

Richard Fulmer

Nov 22 2023 at 12:26pm.

In the U.S. no one haggles over the price of a can of beans or a bag of rice. The pennies we might save aren’t worth the time or the effort. But I’ve been to countries in which people are so poor that a few pennies mean a lot and they do haggle over such things. Here, most of us will still bargain over the price of a house or a car because a few hundred or a few thousand dollars are material to us. However, as we’ve become wealthier, car dealers advertising “no dicker stickers” are becoming more popular.

David Henderson

Nov 22 2023 at 2:22pm.

Nicely done.

I was pondering this on my way to work this morning. I might do a whole blog post on this but this is my quick recollection.

One of the things that most economists, including me, believe is that pay is based on the value of one’s output. On the way to work this morning, I heard a song on my FM channel by a young woman complaining that she was underpaid. I realized how often I hear that. Then my next thought was that even when I was in my teens and working in part-time jobs, I always understood that pay was based on productivity. I never told myself I was underpaid. I would then figure out how to be more productive in a job or, more likely, because job performance was constrained in some ways, how to find a job in which I would be more productive.

Ahmed Fares

Nov 22 2023 at 3:27pm.

“Most of economics can be summarized in four words: “People respond to incentives.” The rest is commentary.” — Steven E. Landsburg, The Armchair Economist

Nov 22 2023 at 5:31pm

Echoing above I would say that both my reading and managing have hit home that incentives matter, with the corollary that it’s not always obvious which incentives are important. There have been times when I misread incentives and times when I asked and people lied to me, so figuring them out is important. Dave mentions compensation and I think he is sort of right but at least in my profession it is also heavily driven by market conditions, basic supply and demand. Output of my midlevels, eg, has increased slightly over the last 20 years but pay has varied pretty widely depending upon local market conditions.

Also on compensation, I remain surprised at how few people understand the concept of total compensation and remain fixated only on salary. Individual financial needs vary so occasionally someone tells me they need the take home and dont care about the retirement plan and other benefits but lots of people dont seem to be able to grasp the idea even after an explanation and bypass much better total compensation to get a small amount of extra salary.

Nov 23 2023 at 11:27am

Today is a good day to talk about complimentary goods. Turkey and dressing, mashed potatoes and gravy, green beans with bacon, bread and butter, whipped cream on pumpkin pie. There are no substitutes…

Happy Thanksgiving!

Creigh Gordon

Nov 24 2023 at 1:06pm.

The real cost of anything is what you have to give up in order to get it.

Applies to leisure/retirement as well as everything else.

Aysha Ayyoob

Nov 25 2023 at 2:15am.

The economics concept which is most relatable to me was relationship between marginal and total productivity in real life .

Law of variable proportion also known as short run production law helps us to envision how high amount of labour in a sector(eg.farmland,factory unit) can lead to decrease in productivity.For eg,If 2 labours are required to operate a machine ,both the labours will work at full capacity and produce an output of 100 units(50 each).suppose two more labours are employed to operate the same machine in the night shift ,then productivity increases to 100 units (total 200 units) but if two more labour are employed for the sake of employment in the morning shift, where already two labours are working ,will reduce productivity and labours will work less than their potential ,therefore TP may increase but MP declines.

Reduction MP is beacuse of many reasons such as- overcrowding→talks and gossiping among the workers →demand to raise wage →low productivity.

I hope it was helpful.

Nov 25 2023 at 3:41pm

The following is a comment from “Economics StackExchange” about the Cobb-Douglas production function:

If one reads the original article by Cobb and Douglas (1928), one will find at the end of page 152 that the authors stress that they took into account two properties that had been theoretically discussed in the past: 1: That production exhibits constant returns to scale, meaning that doubling all inputs will double output. 2: That both production inputs are necessary for production, so output should be zero when either one is zero. To satisfy the 2nd property, they chose the multiplicative form. Given this, to satisfy the first property they had to make the sum of the exponents equal unity, so $a$, and $1-a$. We have $0<a<1$ so that output responds positively to each output. The existence of the constant $A$ in $Q = AK^aL^{1-a}$ takes care of two things: any “units of measurement” issues but also, the average of any other forces that may contribute to output.

A link to the Cobb-Douglas production function article mentioned above (opens in a pdf file):

https://www.aeaweb.org/aer/top20/18.1.139-165.pdf

Grand Rapids Mike

Nov 27 2023 at 9:08am.

Another contrast showing the effect of differences in taxes and regulation between states can be seen by examining the economic condition of the border cities of Illinois and Iowa. Specifically the Quad Cites area, with Rock Island and Moline on the Illinois side and Davenport and Bettendorf on the Iowa side. The Iowa side cities in this area are thriving the Illinois cities not so much.

Comments are closed.

How Much Does $100 Billion in Federal Spending Cos...

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George Shultz, secretary of state in the early 1980s, was also a first-rate economist. As a good economist, he put out a press release showing how little the average taxpaying household paid for aid to El Salvador. As I recall, it was about $34. (I can’t find a source.) Shultz seemed to think that $34 was a small num...

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Why Is Economics Important? Here Are Your Need-To-Know Facts

Updated: June 19, 2024

Published: May 16, 2020

Why-Is-Economics-Important-Here-Are-Your-Need-To-Know-Facts

No one subject is better than another. However, numbers and figures play a large role in how societies function. Economics is the study of the facts and figures that affect government, households, families, businesses, and the overall state of the world’s resources. For those who have ever wondered, “why is economics important?” or been unsure of why economics is a smart subject to study, we will fill you in on all you need to know.

Understanding economics can change your life on a day-to-day level, as well as play a role in helping you understand the bigger picture of your local government and world affairs. We will break down the details: from defining economics to reasons why one may choose to major in the subject in college.

Photo by Pixabay from Pexels

What is economics.

Put in the most simple of terms, economics is the study of resources. It’s the methods and practices that help to quantify, optimize, and conserve resources on the level of: governments, businesses, households, societies, and individuals.

The broad nature of the subject means that it can be broken down into smaller pieces. For example, there are two main frameworks in which one can study economics, namely:

1. Macroeconomics

The big-picture study of what affects the economy as a whole. This can include imports and exports or the unemployment rate, for example.

2. Microeconomics

The study of resources on an individual and company level. Examples include: the study of supply and demand or how regulations may affect a business’ bottom line.

Why Does Economics Matter?

Economics affects everyone. It’s a misconception to think that only economists, financial professionals, and politicians should know about economics. As an individual in society, economics will play a role in your personal life, as well as your professional career.

Whatever happens in society and the world will come to touch your daily life in one way or another — whether it’s in the form of an unemployment rate or interest rates for banks. While you may not need to major in economics, it’s still important to have some kind of an understanding of the subject.

Economics play a role in all of the following major life experiences:

How the government plans policies
The state of the housing market and real estate investment opportunities
The ability to make wise financial decisions
The decision of whether or not to attend graduate school
The cost and benefit of changing one’s career
The development of public healthcare initiatives
How to prevent crime
Ways to reduce racism and inequality

The two main underlying principles in economics are: 1. resources have a limit and 2. society aims to use resources as efficiently as possible. This makes it clear as to why economics are important to every person in the world.

The Market For Economics Knowledge: Things You Learn

Some people are particularly inclined to know the ins and outs of economics. Depending on your future career goals or even just your passion for the subject, majoring in economics can be a wise decision.

As an undergraduate who chooses to major in the subject, you will benefit from the following:

A wide array of job opportunities, including: accounting, banking, marketing, business, and consulting in the government, private sector, or public sector
A rigorous foundation in data analysis with the ability to apply the knowledge in practical settings
An understanding of microeconomics and macroeconomics
Learning what is practical and applicable to real-life choices and decision-making
The ability to solve problems
Knowledge for how to make wise financial decisions
Understanding of statistical and mathematical techniques
Expertise in the use of technology and computers for data analysis

Photo by Markus Spiske on Unsplash

The basics of economics.

Perhaps you don’t know much about the subject, but this has been an intriguing beginning. Let’s take a look at some of the basic principles of economics for a better understanding.

1. The Problem Of Scarcity

Everything you consume has a limit. On an individual level, you have to choose how much food you buy or how many new t-shirts you can afford. On a national level, governments have to decide how to allocate funds between defense or environmental protection. This is all because of scarcity.

Every resource — be it human production, skill, or natural resource — is capped. So scarcity creates a system of supply and demand that is altered by each individual’s constraints and choices that affect the whole.

2. The Division And Specialization Of Labor

Because each individual has a different skillset or desire to produce a different product, there is a natural division of labor. Coined by author Adam Smith in his work The Wealth of Nations, a division of labor is the idea that things are produced by different people. At the heart of economics, this truth has created jobs and businesses that divide tasks amongst its employees.

In a democratic society, it also gives you the right to study in and major in whatever you want to. To fulfill the career of your choice, you can specialize in education first. As our world leverages technology for improvement, schools like the University of the People are even able to provide tuition-free online education so that anyone can pursue their passions!

3. Division Of Labor Increases Production

Since 10 people creating a product will produce more in an hour than just one person creating the same product, it’s understandable why dividing labor and tasks can increase production. With division of labor comes specialization. On a small scale, this is the idea that some people major in Health Science while others major in Computer Science, depending on what they are better at.

Specialization and division of labor work together to produce competitive advantages in businesses and world economies.

4. Trade And Markets

Lastly, specialization results in trade and different markets for goods. This is because not everyone can make or do everything. So, societies use their goods to trade for other goods that they don’t produce.

Economics Is In Everything

Hopefully, just by understanding the basics of economics, you’ve come to realize how much of your personal life, college major, future career, and overall worldview is shaped by the matter.

Economics addresses and solves for:

How to deal with a shortage of materials
How to distribute resources in society
How much government should be involved in personal lives
What opportunity cost means
How to operate societies efficiently
How to plan for the future with forecasts
How to cope with economic crisis
How to evaluate the current state of societies
How people make their choices (behavioral economics)
Career opportunities and the job market

The Bottom Line

Every individual affects their society, and in turn, the world. From the small choices of what you buy to the larger choices of where you attend college, every decision you make will play a role in supply and demand, and as such, the overall economy. Economics is the study of resources and how to efficiently and effectively manage them so that people have what they need to live.

Those who choose to major in economics open the door to many job opportunities and careers in government, non-profits, and both public and private sectors. From banking to accounting, data analytics and more, a background in economics is highly beneficial.

An undergraduate in economics is also a great starting point to earn your Master’s in Business Administration because of the overlapping knowledge. For more on how you can obtain a tuition-free MBA online, check out the University of the People’s MBA program !

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7 Reasons Why You Should Study Economics

30 Nov 2017

An economics course can teach you the fundamentals needed to decipher graphs and other important financial data, as well as the tools to develop a successful business strategy.

But how can you know if studying economics is right for you? Consider the possible outcomes of various economics programs and how they compare to your personal and professional goals.

What Is Economics?

At its core, economics is the study of how individuals, groups, and nations manage and use resources.

Economics can be broken down into microeconomics , which examines individual decisions, and macroeconomics , which is concerned with the economy as a whole. Both types of economics utilize historical trends and current conditions to inform business decision-making and make predictions of how markets will behave in the future.

Why Is Studying Economics Important?

Students who choose to study economics not only gain the skills needed to understand complex markets but come away with strong analytical and problem-solving skills, as well as the business acumen necessary to succeed in the professional world.

In fact, economics can be useful for professionals in all industries and aspects of daily life, not just in business.

Access your free e-book today.

7 Reasons to Study Economics

Here’s a look at seven advantages of studying economics and how it can benefit both your organization and career.

1. You'll Expand Your Vocabulary

Whether it’s scarcity (limited resources), opportunity cost (what must be given up to obtain something else), or equilibrium (the price at which demand equals supply), an economics course will give you fluency in fundamental terms needed to understand how markets work. Even if you don’t use these words often in your current role, studying these economic terms will give you a better understanding of market dynamics as a whole and how they apply to your organization.

2. You’ll Put New Terms into Practice

Economics isn’t just learning a set of technical words, it’s actually using them to develop a viable business strategy . Once you understand the terms, it’s easier to use theories and frameworks, like Porter’s Five Forces and SWOT analyses, to assess situations and make a variety of economic decisions for your organization. For example, many companies need to decide whether to pursue a bundled or unbundled pricing model or strategize for the best ways to maximize revenue .

3. You’ll Understand Your Own Spending Habits

Economics will teach you about how your organization and its market behaves, but also offer insights into your own spending habits and values. For example, Willingness to Pay (WTP) is the maximum amount someone is willing to pay for a good or service. There’s frequently a gap between hypothetical and actual WTP, and learning about it can help you decode your own behavior and enable you to make wiser financial decisions.

Demand curve; width: 50px; align: right;

For Shamari Benton, the concepts he learned in Economics for Managers opened his eyes to how everyday decisions are infused with economic calculations and principles.

“A simple grocery store visit becomes filled with economic references and analytical ponders,” Benton says.

4. You’ll Master the Nuances of the Field

Many people think of economics as just curves, models, and relationships , but in reality, economics is much more nuanced. Much of economic theory is based on assumptions of how people behave rationally, but it’s important to know what to do when those assumptions fail. Learning about cognitive biases that affect our economic decision-making processes arms you with the tools to predict human behavior in the real world, whether people act rationally or irrationally.

5. You’ll Learn How to Leverage Economic Tools

Learning economic theory is one thing, but developing the tools to make business decisions is another. Economics will teach you the basics and also give you concrete tools for analysis. For example, conjoint analysis is a statistical approach to measuring consumer demand for specific product features. This tool will allow you to get at the surprisingly complicated feature versus price tradeoffs that consumers make every day.

For example, imagine you work for Apple Inc. and you want to know what part of the iPhone should improve: Battery life, screen size, or camera. A conjoint analysis will let you know which improvements customers care about and which are worth the company’s time and money.

6. You’ll Be Better-Prepared for Graduate School

In addition to helping you make better decisions in both your personal and professional life, learning economics is also beneficial if you’re considering a graduate business degree. Studying economics can equip you with the problem-solving skills and technical knowledge needed to prepare for an MBA .

An MBA typically includes courses in finance, accounting, management, marketing, and economics, so if you decide an MBA is right for you, you’ll already be one step ahead. Furthermore, a foundational knowledge of economics enables you to use economic theories and frameworks to decide if graduate school is worth the financial investment.

7. You’ll Improve Your Career Prospects

An education in economics can improve your employability in a variety of industries. According to the World Economic Forum's Future of Jobs Report , analytical thinking and complex problem-solving skills top the list of transferable skills that employers will find increasingly important by 2025, both of which can be gained by studying economics.

In addition, many careers require knowledge of economic concepts, models, and relationships. Some possible career paths for economics students include finance, banking, insurance, politics, and healthcare administration . You’ll also be able to further your career in your current industry, as an understanding of the economics that power your industry can help you to be more effective in your role.

A Guide to Advancing Your Career with Essentials Business Skills | Access Your Free E-Book | Download Now

Options for Studying Economics

There are many options available for those looking to pursue an education in economics. Depending on your personal and professional goals, your current stage in life, and other important factors, you may choose to pursue an undergraduate or graduate degree in economics or take an online economics course to expand your future career opportunities.

Whether you're new to the business world or an experienced manager, having a thorough understanding of how markets work, pricing strategy, and consumer behavior is essential to success.

Do you want to take your career to the next level? Explore our eight-week online course Economics for Managers or other business essentials courses to learn how to apply economic principles to business decisions.

This post was updated on June 8, 2022. It was originally published on November 30, 2017.

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The role and importance of studying economics

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Economics and Its Meaning in Everyday Life Research Paper

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Introduction

Modern economics, profit maximisation, social benefit.

Economics is the social science of making sufficient choices or decisions and studies how people interact in their society economically. This paper introduces the subject of economics and unfolds what it is all about. We live in a society where economics is a valuable need in order for us to understand and handle any problems that may occur in the future. The basic economic problem is scarcity, where people’s wants and needs are unlimited. Every time a need is satisfied, a new need is then created thus, creates the unlimited wants and needs of the human characteristic. The problem of scarcity results in allocation, which is the process of choosing needs that will be gratified and how many resources we will use in order to satisfy them. Because there are so many wants waiting to be satisfied, there are only so many resources to fulfill those wants. Limited resources are the condition of there not being enough resources to fulfill all wants and needs.

Since economics is all about making choices, people must understand the cost and benefits of any choice in order to make competent choices. Opportunity cost and Opportunity benefits guide the decisions process of individuals and countries and determine the goods to which they are going to be produced. However, Opportunity cost is the option that you must give up when you make a choice, and opportunity benefit is what you gain by making a certain decision. An example of opportunity cost and opportunity benefit is assumed one night you have a stack of homework waiting for you to do, but when your parents get home, they demand that you go out with them to eat dinner and catch a flick afterward. Yet you really want to do your homework and study, but you give up your education time to spend the night with your parents. Your opportunity cost of this is what you give up, and that is your study time; however, you do gain a benefit from giving up your homework, and that is a movie and a casual dinner with your parents.

Every society has basic economic questions, and when responding to these questions, societies must balance the needs of individuals with the needs of society together. The subject Economics is divided into two separate branches: microeconomics which examines the choices of individuals regarding one product, one firm, or one industry, and macroeconomics examines the conduct of the whole economy at once. Everything in life has a theory; in economics, the importance of theory is a simplified description of reality. The economic theory helps to understand the economic systems, which are the combination of social and individual decision-making it uses to answer the three economic questions. Economist uses an ideological tool called a budget constraint that is the mixture of goods that can be acquired although it is given a limited amount of income. A person goes through life they will make economic decisions as a consumer, as a worker, and as a citizen that will make an understanding of economic theory an important part of everyday life. (Cubitt, 2005).

Countries such as the United States use a variance of approaches in order to answer the basic economic questions. A market economy is buyers and sellers and is the state of trade as determined by prices, supply, and demand. The question of what to produce is decided by individual consumers and producers in the marketplace by using the price system. A command economy is all about government planners deciding what is produced and available for sale. A traditional economy is where prices are set because of holidays. A mixed economy is a combination of a market, command, and traditional economy. Although the U.S. has a great economy, the main economic problem still lies in our hands. Scarcity and choice exist in all economies. However, like our society, other societies use different combinations of individual and social choices to allocate resources.

Modern economics vs. political economy, as it used to be called-dates back to1776. It begins with the American Revolution. A man named Adam Smith, a Scottish philosopher, published a book called Smith’s work is considered the first example of modern economics. In some places, Smith is most famous for suggesting that businesses always try to monopolize markets and raise prices. Economists credit Adam Smith’s theory of the invisible hand – the idea that a market economy will operate so that no one can be made better off without making someone else worse off. It is as if an invisible hand is guiding the markets when in reality, the markets merely reflect the activities of those trading in them.

When prices for some widely consumed good or service surge or when some company s profits appear to reach stratospheric levels, the popular press seems to return to St. Augustine and ask what is the just price. Others maintain that economics began much, much earlier. Economics figures in most national elections. John Kennedy was elected during the recession that plagued the prior administration; the recession ended in the second month of Kennedy s term as he demonstrated a combination of timing and luck matched by few Presidents. Franklin D. Roosevelt s landslide victory in 1936-based on his efforts to turn back the Great Depression- set the course for the next several decades of U.S. politics. The economy is telling us what s happening and what could happen next. To understand the economy, you have to look at how the economy is measured, scaled, and gauged. How big, rich fast-growing it is. The economy in the United States and increasingly throughout the world is organized into markets. Markets are where we trade things- someone s labor, time, and effort for his wage; or hard-earned dollars for a car.

Markets are rather old-maybe as old as civilization itself. Markets are crucial to understanding the economy. They include much more than the stock market, although that one is quite interesting. Markets exist for almost anything-time and labor, art, cars, things we make, and services we buy. Most markets have common elements, patterns that make buying a car and getting a second opinion before surgery almost the same thing. As the axiom goes, the only constant changes. In the economy, changes occur all the time. They are what shift prices ad gives rise to opportunities.

Economics is the rules of the game, how we organize society. Most of what we see as important in everyday life is organized by the economy. On a day-to-day basis, economics has to do with what kind of job we have or don’t have; with how much money we can earn; with what things cost; with whether we can save and invest enough for a comfortable future; with how much we need tomorrow and with how well off our children will be in coming years. Economics is why we have jobs. Why we work, why we earn incomes, why money matters, and why markets are important. Economic ideas contribute to the way our society is organized. That the kind of organization we have today has evolved gradually doesn’t t make the principles behind it any less important. It evolved through history to the current arrangement and is still changing and evolving. The social fabric is always likely to be changing. Many of the principles behind the current organization depend on economics and include many ideas.

Principles of economics include Private property- we can own land, houses, tools, books, and all kinds of other goods and use them, or dispose of them, as we wish. Another is a job. We have jobs and earn income with our labor. Human rights-we do to own other people and don’t have pre-emptive rights to someone else s labor and property. Markets- the way we exchange private property or exchange labor for income is through a voluntary bargaining process called a market. We use money as a way to store wealth and to buy and sell things we own, including our own labor.

The thing that distinguishes markets and money from other elements of the economy is that they are a little more fundamental. In almost any society based on private property, both money and markets are present. Not much private property is needed to give rise to markets and money just enough so that people have some things to exchanges and need a way to keep track of how much money they have. Trading has been practiced since before recorded history. Ancient tribes traded with one another to get essential tools that were hard to make locally. (Samuelson, 2005) Today economist speaks of gains form trade.

The most misunderstood part of economics is in public debates. Recently the political arena has echoed with arguments over the budget deficit and the national debt. We hear every possible opinion, from claims that we are about to drown in our own red ink, to suggestions that we ignore the debt, to claims that cutting our taxes will lead to larger tax revenues for the government and a drop in the deficit. Some of these arguments are involved; the difference between the national debt and the budget deficit is rather straightforward. Each year the government collects taxes and spends money. When expenditures exceed revenues, the government is left with a gap. This gap is the deficit.

Expenditures cover a wide range of items, including social security benefits, Medicare and Medicaid payments, salaries of government workers, foreign aid, and government purchases from paper clips to jet planes. The numbers and reports on the national debt have another important complication. The government saves some revenues by investing them in Treasury bonds. Measurement of economics has a venerable history. For a long time, people thought the only thing to economics was measuring or counting. Forecasts almost always require numbers- at times to provide a forecast that really gets specific, at other times to make a vague forecast look specific enough to be worth paying for. (Fontaine, 2005) Sometimes economics drives the way we measure. As we look at the unemployment rate, deciding what we measure often involves understanding the economy and its various sectors and markets larger.

Some longer-term issues related to the deficit are also legitimate concerns. Over the last few decades, the proportion of total income that America saves and invests in forth future has declined. If we invest less today, there will be less wealth tomorrow. One reflection of the decline in savings is the rise of the deficit. Simply worrying about the deficit, some politicians argue, is the wrong response. Increasing savings is the right response. Japan, in its peak years of economic growth, had far more savings and a far larger than in the United States.

One of the more recent developments in mathematics, physics, and related sciences is a collection of studies alternately referred to as complexity theory, self-organization, and chaos theory. While some commentators may argue that economics has a special claim on chaos, there are interesting parallels between many of these studies and economics. (Keen, 2004) One of the ideas behind these theories is that at times a collection of objects- animals, computer programs, people, or almost anything else-will seem to become very well organized without any systematic communication or planning.

The economy surrounds us, and it plays a large part in our lives. It has more impact than the weather on how we live and how well we live. Economics runs through other parts of our lives as well. If the economy is in a recession or a depression, it hits a lot of people. The economy helps us keep track of the nation’s standing. The economic system has grown since Adam Smith s book. Right now, since the economy is good, it is easy to get jobs. During a recession or a depression, the economy is the indication of what is going wrong and what to fix. Everyday life is circled around the economy. The different kinds of markets provide a different understanding. The stock market also is an indicator of the economy. The stock market shows the sales and wealth of the different markets around our country. If the economy is good, we know it. It shows everywhere, and politicians don’t hesitate to base an election on how well they did or how awful the economy was under another politician. It will make or break the politician.

All of the businesses have common factors. They all provide products in the form of goods or services. For example, books, food, fitness training, utilities, etc., some of the products provided by businesses are needed by customers. They are, in essence, providing necessities, for example, basic food and clothing. Some businesses, on the other hand, provided products that customers can be persuaded to want through advertising. For example, luxury food, fashion clothing, or a holiday, etc. A business may therefore be defined as; an organization that provides goods or services which satisfy customer needs and wants.

The objective of profit maximization brings with it an imperative question to be considered in great detail; should businesses maximize profits? Businesses have a social responsibility. They need to aim to reduce pollution, improve safety levels, and preserve jobs, etc. firms, in the effort to maximize profits, go against many social and ethical issues, for example, if materials needed by a firm can be found cheaper abroad, profit-maximizing firms will by from countries whose political regimes, the U.K. public may not approve of. It is argued, however, that in order to pay attention to aspects, such as pollution levels, and preservation of jobs, etc., the firm needs to be financially stable. In other words, they need to be making a profit. The importance of profit is just one aspect of the profit-maximizing position of a firm, which adopts the profit-maximizing objective. (Ernst, 2007).

In a short conclusion to the profit-maximizing objective of a firm, one might suggest that there is only one valid definition of a business’s purpose: to create a customer. Profits, then, are the results of being in business. They test how efficiently a business has created a customer in terms of the cost to the business in relation to the revenue gained through the customer.

The size of a firm displays a close correlation to sales revenue. As such, sales revenue is often considered a surrogate. It is said that although high levels of profit bring with it benefits to the owners or shareholders of a firm, high levels of sales revenue, on the other hand, brings with it benefits for managers, for example, higher levels of income.

One major difference to note between profit maximization and revenue maximization is the term to which the objectives are set. A firm whose overall objective is profit maximization is said to have such an objective set long term. In other words, the objective is hoped to be met over a five-year period. A firm whose overall objective, on the other hand, is revenue maximization, is said to have such an objective set short term, the objective is hoped to be met over a two-year period. (Fullbrook, 2004) Perhaps another significant difference to note is that of by whom such objectives have been set. Managers had both the ability and motivation to pursue objectives other than Profit Maximisation, and as we will see soon, this ability and motivation of firm’s managers extend to them being able to pursue Non-Maximising objectives, for example, Social Benefit. Similarly to Revenue Maximisation, controllers of a firm are more interested in objectives that satisfy them, such as Salary, prestige, and status, and job security. (MacKenzie, 2003).

As with those who commit to Revenue Maximising objectives, those who set Growth Maximisation as their objective do so with consideration of what growth the owners in the firm want to see, such as profit, sales, and market share. These different sets of objectives are reconciled by concentrating on the growth of the size of the firm, which in turn will bring with it high salaries and status for managers and larger profits and market shares to keep the shareholders happy. As with the Profit Maximising objective, growth maximization has to limit factors or constraints, both managerial and financial. Finding a product or a market to expand can prove problematic to the management team of a firm. Having found an area of expansion, the management team also faces the limitation of remaining in control of such expansions.

In order to become a growth-driven company, investments need to be made. The funds required for such investments are ever-increasing and can be obtained by either internal investments by the use of retained profit, or external investments funded by borrowing, the latter creating further liabilities for the firm. (Amos, 1994) If either of the aforementioned means of investments is not closely controlled, the risk of either takeovers or shareholder revolt is increased, which intern would have a knock-on effect on the job security of management. Ensuring that the growth of demand is matched equally by the growth in capital supplied can satisfy the above constraints. Control of the leverage revenue will help to keep the level of borrowing in check. Control of the liquidity ratio can prevent a firm from becoming insolvent. Finally, via the retention ratio, profits can be distributed sufficiently in order to keep shareholders happy.

Businesses have a significant contribution to social welfare; we visited this idea earlier when discussing the profit maximization objective of a firm, where one stated the importance of pollution reduction and job security etc. By paying attention to the social welfare of consumers and employees, those within firms will benefit. Namely, suppliers of capital, labor, and other resources that have in the past received substantial returns for their contribution to the improvement of social welfare. Consumers can also benefit where social benefit is the key objective of a firm, through increasing the quality and quantity of the goods and services available to them for consumption.

The public can, in many ways, be the backbone of a firm. They state that the very existence of certain firms is a result of public consent and that as such, those firms that are amongst the most successful tend to be those that exercise socially responsible behavior. It is said that Social Benefit is not a maximizing objective because, in order to be an objective, it would be required to be measurable. Rather, the social benefit is considered in terms of what combinations of goods and services should be produced? How many goods and services should be provided? And finally, how they should be distributed.

There are five main maximization objectives of a firm. You will have noticed throughout the descriptions a mention of the differentiation between managers and owners of a firm. Most large firms tend to be run by professional management teams rather than the owner of the firm. As such, conflicts in the interests or direction of the firm can and do happen. Such conflicts occur as a result of differences between the objectives of the owners and of the managers, also referred to as controllers. The main aim of the owner of a firm is that of maximization of the overall value of the firm, whether that is maintained through profit maximization, revenue maximization, management utility theory, company growth, or indeed social benefit.

The above conflicting interests of a firm’s progression can be better defined as the principal-agent problem, whereby objectives, different to those of the principle, also referred to as the owner, are pursued by the agent, also referred to as the controller or manager. The problem or conflict occurs when the principle has difficulty enforcing their contracts upon the agent or when the monitoring of the agent to verify that they are furthering the principle’s objectives becomes unjustifiably costly.

In economics, profits are not merely an objective; they are, in fact, the very reason for the existence of the business enterprise. The statement alone opens discussions regarding the existence of a firm. For Example, A charity shop, by its very nature, does not thrive on profit as a means of existence, rather, it relies on the generosity of the general public, and therefore it would be fair to suggest that the objective of most charity shops is a social benefit. The nature of a business, its size, location, and management model will all together determine the route to which the company wishes to follow. Thus the objectives it will set. When looking into any business, large or small, one will see that no single decision is clear, there are many clouds surrounding the smallest of decisions, and so the analysis of firms, and in particular, the objectivity of a firm, cannot be made in black and white, there is simply too much about the organization, macro and microeconomics, politics and social factors to consider, all of which are ever-changing.

Amos, Orley. Economic Literacy . Hawthornel, New Jersey: Career Press, (1994).

Cubitt, Robin (2005) “Experiments and the Domain of Economic Theory,” Journal of Economic Methodology 12: 297-210.

Ernst, Z. (2007) “Philosophical Issues Arising from Experimental Economics”, Philosophy Compass, Blackwell.

Fontaine, P. and R. Leonard (2005) The Experiment in the History of Economics London: Routledge.

Fullbrook, Edward, What’s Wrong With Economics, Anthem, (2004).

Keen, Steve, Debunking Economics, Zed Books, (2004).

MacKenzie, D. F. Muniesa and L. Siu (eds.) (2003): Do Economists Make Markets? On the Performativity of Economics. Princeton: Princeton University Press.

Samuelson, L. (2005) “Economic Theory and Experimental Economics”, Journal of Economic Literature 43: 65-107.

The Synergy Between Capitalism and Democracy
Basics of Microeconomics and Macroeconomics
The Walmart Firm’s Funding Strategies for Growth Maximization
Determinants of Wages: Earning Potential Maximization
The Goal of the Firm: Maximization of the Wealth
Pitt County: Urban Economics and Export-Based Theories
Marx and Weber in Relation to History: Materialism and Existential Idealism
Reductionist Effect in Macroeconomics
Government: The Cause or the Solution
Financial Accounting Theory: Capture Theory and Economic Interest Theory
Chicago (A-D)
Chicago (N-B)

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What is economic growth? And why is it so important?

The goods and services that we all need are not just there – they need to be produced – and growth means that their quality and quantity increase..

Good health, a place to live, access to education, nutrition, social connections, respect, peace, human rights, a healthy environment, and happiness. These are just some of the many aspects we care about in our lives.

At the heart of many of these aspects that we care about are needs for which we require particular goods and services . Think of those that are needed for the goals on the list above – the health services from nurses and doctors, the home you live in, or the teachers who provide education.

Poverty, prosperity, and growth are often measured in monetary terms, most commonly as people’s income. But while monetary measures have some important advantages, they have the big disadvantage that they are abstract. In the worst case, monetary measures – like GDP per capita – are so abstract that we forget what they are actually about: people’s access to goods and services.

The point of this text is to show why economic growth is important and how the abstract monetary measures tell us about the reality of people’s material living conditions around the world and throughout history:

In the first part, I want to explain what economic growth is and why it is so difficult to measure.
In the second part, I will discuss the advantages and disadvantages of several measures of growth, and you will find the latest data on several of these measures so that we can see what they tell us about how people’s material living conditions have changed.

What are these goods and services that I’m talking about?

Have a look around yourself right now. Many of the things you see are products that were produced by someone so that you can use them: the trousers you are wearing, the device you are reading this on, the electricity that powers it, the furniture around you, the toilet that is nearby, the sewage system it is connected to, the bus or car or bicycle you took to get where you are, the food you had this morning, the medications you will receive when you get sick, every window in your home, every shirt in your wardrobe, and every book on your shelf.

At some point in the past, many of these products were not available. The majority did not have access to the most basic goods and services they needed. A recent study on the history of global poverty estimates that just two centuries ago, roughly three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.” 1

Let’s look at the history of the last item on that list above, books.

A few centuries ago, the only way to produce a book was for a scribe to copy it word-for-word by hand. Book production was a slow process; it took a scribe about eight months of daily work to produce a single copy of the Bible. 2

It was so laborious that only very few books were produced. The chart shows the estimates of historians. 3

But then, in the 15th century, the goldsmith Johannes Gutenberg combined the idea of movable letters with the mechanism that he knew from the wine presses in his hometown. He developed the printing press. Gutenberg developed a new production technology, and it changed things dramatically. Instead of spending months to produce one book, a worker was now able to produce several books a day.

As the printing press spread across Europe, book production soared. Books, which were previously only available to a tiny elite, became available to more and more people.

This is one example of how growth is possible and what economic growth is : an increase in the production of goods and services that people produce for each other.

A list of goods and services that people produce for each other

Before we get to a more detailed definition of economic growth, it’s helpful to remind ourselves of the astonishingly wide range of goods and services that people produce. I think this is helpful because measures of economic output can easily become abstract. This abstraction means we easily lose the mental connection to the goods and services such measures actually talk about.

This list of goods and services isn’t meant as a definitive list, but it helped me to think about the relevance of poverty and growth: 4

At home: Light in your home at night; the sewage system; a shower; vacuum cleaner; fridge; heating; air conditioning; electricity; windows; a toilet – even a flush toilet; soap; a balcony or a garden; running water; warm water; cutlery and dishes; a hut – or even a warm apartment or house; an oven; sewing machine; a stove (that doesn’t poison you ); carpet; toilet paper; trash bags; music recordings or even online streaming of the world’s music and film; garbage collection; radio; television; a washing machine; 5 furniture; telephone; a comfortable bed, and a room for one’s own.

Food: The most fundamental need is to have enough food. For much of human history, a large share of people suffered from hunger , and millions still do .

But we also need to have a richer and more varied diet to get all of the nutrients we need. Unfortunately, billions still suffer from micronutrient deficiency .

Also, think of clean drinking water; reliable markets and stores with a wide range of available goods; food that rarely poisons you (pasteurized milk, for example); spices; tea and coffee; kitchen utensils and practical ingredients (from a bag of flour to canned soups or a yogurt); chocolate and sweets; fresh fruit and vegetables; bread; take-away food or the possibility to go to a restaurant; ways to protect your food from spoiling (from the cold chain that delivers the goods to the cellophane to wrap it with); wine or beer; fertilizer ( very important); and tractors to work the fields.

Knowledge: Education from primary up to university level; books; data that allows us to understand the world around us; newspapers; vocational training; kindergartens; and scientific knowledge to understand ourselves and the world around us.

Infrastructure: Public transportation with buses, subways, and trains; roads; paved roads; airplanes; bridges; financial services (including bank accounts, ATMs, and credit cards); cities; a network of competent workers that can help you to fix problems; postal services (that delivers fast); national parks; street cleaning; public swimming pools (even private pools); firefighters; parks; online shopping; weather forecasts; and a waste management system.

Tools and technologies: Pencils, ballpoint pens, and paper; lawnmowers; cars; car mechanics; bicycles; power tools like drills (even battery-powered ones); a watch; computers and laptops; smartphones (with GPS and a good camera); being able to stay in touch with distant friends or family members (or even visiting them); GPS; batteries; telephones and mobiles; video calls; WiFi; and the internet right here.

Social services: Caretakers for those who are disabled, sick, or elderly; protection from crime; non-profit organizations financed by the public, by donations or by philanthropies; insurance (against many different risks); and a legal system with judges and lawyers that implement the rule of law.

There is also a wide range of transfer payments, which in themselves are not services (they are transfers) but which become more affordable as a society becomes more prosperous: sick leave and disability benefits; unemployment benefits; and being able to help others with a regular donation of some of your income to an effective charity . 6

Life and free time : tents; travel and holidays; surfboards; skis; board games; hotels; playgrounds; children’s toys; courses to learn hobbies (from painting to musical instruments or courses on the environment around us); a football; pets; the cinema, theater or a music concert; clothes (even comfortable and good-looking ones that keep you warm and protect you from the rain); shoes (even shoes for different purposes); shoe repair; the contraceptive pill and the ability to choose if and when to have children; sports classes from rock climbing to pilates and yoga; cigarettes (not all goods that people produce for each other are good for them); 7 a musical instrument; a camera; and parties to celebrate life.

Health and staying well: Dentists; antibiotics; surgeries; anesthesia; mental health care from psychologists and psychiatrists; vaccines; public sewage; a haircut; a massage; midwives; ambulances; modern medicine; band-aids; pharmaceutical drugs; sanitary pads; toothbrushes; dental floss (some do floss); disinfectants; glasses; sunglasses; contact lenses; hearing aids; and hospitals – including very well-equipped, modern hospitals that offer CT scans, which include intensive care units and allow heart or brain surgery or organ transplants.

Specific needs and wishes: Most of the products listed above are generally helpful to people. But often, the goods and services that are most important to one individual are very specific.

As I’m writing this, I have a big cast on my left leg after I broke it. These days, I depend on products that I had no use for just three weeks ago. To move around, I need two long crutches, and to prevent thrombosis, I need to inject a blood thinner every day. After I broke my leg, I needed the service of nurses and doctors. They had to rely on a range of medical equipment, such as X-ray machines. To get back on my feet, I might need the service of physiotherapists.

We all have very specific needs or wishes for particular goods and services. Some needs arise from bad luck, like an injury. Others are due to a new phase in life – think of the specific goods and services you need when you have a baby or when you take care of an elderly person. And yet others are due to specific interests – think of the needs of a fisherman, or a pianist, or a painter.

All of these goods and services do not just magically appear. They need to be produced. At some point in the past, the production of most of them was zero, and even the most essential ones were extremely scarce. So, if you want to know what economic growth means for your life, look at the list above.

What is economic growth?

So, how can we define what economic growth is?

A definition that can be found in so many publications that I don’t know which one to quote is that economic growth is “an increase in the amount of goods and services produced per head of the population over a period of time.”

The definition in the Oxford Dictionary is almost identical: “Economic growth is the increase in the production of goods and services per head of population over a stated period of time”. And the definition in the Cambridge Dictionary is similar. It defines growth as “an increase in the economy of a country or an area, especially of the value of goods and services the country or area produces.”

In the following footnote, you find more definitions. Bringing these definitions together and taking into account the economic literature more broadly, I suggest the following definition: Economic growth is an increase in the quantity and quality of the economic goods and services that a society produces.

I prefer a definition that is slightly longer than most others. If you want a shorter definition, you can speak of ‘products’ rather than ‘goods and services’, and you can speak of ‘value’ rather than mentioning both the quantity and quality aspects separately.

The most important change in quantity is from zero to one when a new product becomes available. Many of the most important changes in history became possible when new goods and services were developed; think of antibiotics, vaccines, computers, or the telephone.

You find more thoughts on the definition of growth in the footnote. 8

What are economic goods and services?

Many definitions of economic growth simply speak of the production of ‘goods and services’ collectively. This sidesteps a key difficulty in its definition and measurement. Economic growth is not concerned with all goods and services but with a subset of them: economic goods and services.

In everything we do – even in our most mundane activities – we continuously ‘produce’ goods and services in some form. Early in the morning, once we’ve brushed our teeth and made ourselves toast, we have already produced one service and one good. Should we count the tooth-brushing and the toast-making towards the economic production of the country we live in? The question of where to draw the line isn’t easy to answer. But we have to draw the line somewhere. If we don’t, we end up with a concept of production that is so broad that it becomes meaningless; we’d produce a service with every breath we take and every time we scratch our nose.

The line that we have to draw to define the economic goods and services is called the ‘production boundary’. The sketch illustrates the idea. The production boundary defines those goods and services that we consider when we speak about economic growth.

For a huge number of goods or services, there is no question that they are of the ‘economic’ type. But for some of them, it can be complicated to decide on which side of the production boundary they fall. One example is the question of whether the production of illegal goods should be included. Another is whether production within a household should be included – should we consider it as economic production if we grow tomatoes in our backyard and make soup from them? Different authors and different measurement frameworks have given different answers to these questions. 9

There are some characteristics that are helpful in deciding on which side of the boundary a particular product falls. 10 Economic goods and services are those that can be produced and that are scarce in relation to the demand for them. They stand in contrast to free goods, like sunlight, which are abundant, or those many important aspects in our lives that cannot be produced, like friendships. 11 Our everyday language has this right: we don’t refer to the sun or our friendships as a good or service that we ‘produce’.

An economic good or service is provided by people to each other as a solution to a problem they are faced with, and this means that they are considered useful by the person who demands it.

A last characteristic that helps decide whether you are looking at an economic product is “delegability”. An activity is considered to be production in an economic sense if it can be delegated to someone else. This would include many of the goods and services on that long list we considered earlier but would exclude your breathing, for example.

Because economic goods are scarce in relation to the demand for them, human effort is required to produce them. 12 A shorter way of defining growth is, therefore, to say that it is an increase in the production of those products that people produce for each other.

The majority of goods and services on that long list above are uncontroversially of the economic type – everything from the light bulbs and furniture in your home to the roads and bridges that connect your home with the rest of the world. They are scarce in relation to the demand for them and have to be produced by someone; their production is delegable, and they are considered useful by those who want them.

It’s worth recognizing that many of the difficulties in defining the production boundary arise from the effort to make measures of economic production as comparable as possible.

To give just one concrete example of the type of considerations that make the discussion about specific definitions so difficult, let’s look at how the production boundary is drawn in the housing sector.

Imagine two countries that are identical except for one aspect: home ownership. In Country A, everyone rents their homes, and the total sum of annual rent amounts to €2 billion per year. In Country B, everyone owns their own home, and no one pays rent. To provide housing is certainly an economic service, but if we only counted monetary transactions, then we would get the false impression that the value of goods and services in Country A is €2 billion higher than in Country B. To avoid such misjudgment, the production boundary includes the housing services that are provided without any monetary transactions. In National Accounts, statisticians take into account the “imputed rental value of owner-occupied housing” – those households who own their home get assigned an imputed rental value. In the imagined scenario, these imputed rents would amount to €2 billion in Country B so that the prosperity of people in these two countries would be judged to be identical.

It is the case more broadly that National Account figures (like GDP) do include important non-market goods and services that are not included in household survey measures of people’s income. GDP does not only include the housing services by owner-occupied housing but also the provision of most goods and services that are provided by the government or nonprofit institutions.

How can we measure economic growth?

Many discussions about economic growth are extraordinarily confusing. People often talk past one another.

I believe the key reason for this is that the discussion of what economic growth is gets muddled up with how it is measured .

While it is straightforward enough to define what growth is, measuring growth is very, very difficult.

In the worst cases, measures of growth are mixed up with a definition of growth. Growth is often measured as an increase in income or inflation-adjusted GDP per capita. But these measures are not the definition of it – just like life expectancy is a measure of population health but is certainly not the definition of population health.

To see how difficult it is to measure growth, take a moment to think about how you would measure it. How would you determine whether the quantity and quality of all economic goods and services produced by a society increased or decreased over time?

Finding a measure means that you have to find a way to express a huge amount of relevant information in a single metric. As the sketch shows, you have to first measure the quantity and quality of all the many, many goods and services that get produced and then find a way to aggregate all of these measurements into one summarizing metric. No matter what measure you propose for such a difficult task, there will always be problems and shortcomings in any proposal you might make.

In the following section, I will show four possible ways of measuring growth and present some data for each of them to see how they can inform us about the history of material living conditions.

Measuring economic growth by tracking access to particular goods and services

One possible way to measure growth is to make a list of some specific products that people want and to see what share of the population has access to them.

We do this very often at Our World in Data . The chart here shows the share of the world population that has access to four basic resources. All of these statistics measure some particular aspect of economic growth.

You can switch this chart to any country in the world via the “Change country” option. You will find that, judged by this metric, some countries achieved rapid growth – like Indonesia – while others only saw very little growth, like Chad.

The advantage of measuring growth in this way is that it is concrete. It makes clear what exactly is growing, and it’s clear which particular goods and services people gain access to.

The downside is that it only captures a small part of economic growth. There are many other goods and services that people want in addition to water, electricity, sanitation, and cooking technology. 13

You could, of course, expand this approach of measuring growth to many more goods and services, but this is usually not done for both practical and ethical considerations:

One practical reason is that a list of all the products that people value would be extremely long. Keeping lists that track people’s access to all products would be a daunting task: hundreds of different toothbrushes, thousands of different dentists, hundreds of thousands of different dishes in different restaurants, and many millions of different books. 14 If you wanted to measure growth across all goods and services in this way, you’d soon employ half the country in the statistical office.

In practice, any attempt to measure growth as access to particular products, therefore, means that you look only at a relatively small number of very particular goods and services that statisticians or economists are interested in. This is problematic for ethical reasons. It should not be up to the statisticians or economists to determine which few products should be considered valuable.

You might have realized this problem already when you read my list at the beginning of this text. You might have disagreed with the things that I put on that list and thought that some other goods and services were missing. This is why it is important to track incomes and not just access to particular goods: measuring people’s income is a way of measuring the options that they have rather than the choices that they make. It respects people’s judgment to decide for themselves what they find most important for their lives.

On our site, you find many more such metrics of growth that capture whether people have access to particular goods and services:

This chart shows the share of US households having access to specific technologies.
This chart shows the share that has health insurance.
This chart shows access to schools.

Measuring economic growth by tracking the ratio between people’s income and the prices of particular goods and services

To measure the options that a person’s income represents, we have to compare their income with the prices of the goods and services that they want. We have to look at the ratio between income and prices.

The chart here does this for one particular product – books – and brings us back to the history of growth in the publishing sector that we started with. 15 Shown is the ratio between the average income that a worker receives and the price of a book. It shows how long the average worker had to work to buy one book. Note that this data is plotted on a logarithmic axis.

Before the invention of the printing press in the 15th century, the price was often as high as several months of work. The fact that books were unaffordable for almost everyone should not be surprising. It corresponds to what we’ve seen earlier that it took a scribe several months to produce a single book.

The chart also shows how this changed when the printing press increased the productivity of publishing. As the labor required to produce a book declined from many months of work to less than a day, the price fell from months of wages to mere hours.

This shows us how an innovation in technology raises productivity and how an increase in production makes it more affordable. How it increases the options that people have.

Global inequality: How do incomes compare in countries around the world?

In the previous section, we measured growth as the ratio between income and the price of one particular good. But of course, we could do the same for all the many goods and services that people want. This ratio – the ratio between the nominal income that people receive and the prices that people have to pay for goods and services – is called ‘real income’ . 16

Real income = Nominal income / price of goods and services

Real income grows when people’s nominal income increases or when the prices of goods and services decrease.

In contrast to many of the other metrics on Our World in Data, a person’s real income does not matter for its own sake but because it is a means to an end. A means to many ends, in fact.

Economic growth – measured as an increase in people’s real income – means that the ratio between people’s income and the prices of what they can buy is increasing: goods and services become more affordable, and people become less poor. It is because a person has more choices as their income grows that economists care so much about these monetary measures of prosperity.

The two most prominent measures of real income are GDP per capita and people’s incomes, as determined through household surveys.

They are shown in this chart.

Before we get back to the question of economic growth, let’s see what these measures of real income tell us about the economic inequality in the world today.

Both measures show that global inequality is very large. In a rich country like Denmark, an average person can purchase goods and services for $54 a day, while the average Ethiopian can only afford goods and services that cost $3 per day.

Both measures of real incomes in this chart are measured in international dollars, which means that they take into account the level of prices in each country (using purchasing power parity conversion factors). This price adjustment is done in such a way that one international-$ is equivalent to the purchasing power of one US-$ in the US . An income of int.-$3 in Ethiopia, for example, means that it allows you to purchase goods and services in Ethiopia that would cost US-$3 in the US . All dollar values in this text are given in international dollars, even though I often shorten it to just the $-sign.

If you are living in a rich country and you want to have a sense of what it means to live in a poor country – where incomes are 20 times lower – you can imagine that the prices for everything around you suddenly increase 20-fold. 17 If all the things you buy suddenly get 20-times more expensive your real income is 20-times lower. A loaf of bread doesn’t cost $2 but $40, a pair of jeans costs $400, and an old car costs $40,000. If you ask yourself how these price increases would change your daily consumption and your day-to-day life, you can get a sense of what it means to live in a poor country.

The two shown measures of real income differ:

The data on the vertical axis is based on surveys in which researchers go from house to house and ask people about their economic situation. In some countries, people are asked about their income, while in other countries, people are asked about their expenditure – expenditure is income minus savings. In poor countries, these two measures are close to each other since poor people do not have the chance to save much.
On the other hand, GDP per capita starts at the aggregate level and divides the income of the entire economy by the number of people in that country. GDP per capita is higher than per capita survey income because GDP is a more comprehensive measure of income. As we’ve discussed before, it includes an imputed rental value of owner-occupied housing and other differences, such as government expenditure.

Income as a measure of economic prosperity is much more abstract than the metrics we looked at previously. The comparison of incomes of people around the world in this scatterplot measures options, not choices. It shows us that the economic options for billions of people are very low. The majority of the world lives on very low incomes of less than $20, $10, or even $5 per day. In the next section, we’ll see how poverty has changed over time.

GDP per capita vs. Daily income of the poorest 10%
GDP per capita vs. Daily average income

Global poverty and growth: How have incomes changed around the world?

Economic growth, as we said before, is an increase in the production of the quantity and quality of the economic goods and services that a society produces. The total income in a society corresponds to the total sum of goods and services the society produces – everyone’s spending is someone else’s income. This means that the average income corresponds to the level of average production, so that the average income in a society increases when the production of goods and services increases.

Average production = average income

In this final section, let’s see how incomes have changed over time, first as documented in survey incomes and then via GDP per capita.

Measuring economic growth by tracking incomes as reported in household surveys

The chart shows the income of people around the world over time, as reported in household surveys. It shows the share of the world population that lives below different poverty lines: from extremely low poverty lines up to $30 per day, which corresponds to notions of poverty in high-income countries .

Many of the poorest people in the world rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians who produce these figures estimate the monetary value of their home production and add it to their income.

Again, the prices of goods and services are taken into account: these are measures of real incomes. As explained before, incomes are adjusted for price differences between countries, and they are also adjusted for inflation. As a consequence of these two adjustments, incomes are expressed in international dollars in 2017 prices, which means that these income measures express what you would have been able to buy with US dollars in the US in 201 7.

Global economic growth can be seen in this chart as an increasing share of the population living on higher incomes. In 2000 two thirds of the world lived on less than $6.85 per day. In the following 19 years, this share fell by 22 percentage points.

In 2020 and 2021 — during the economic recession that followed the pandemic — the size of the world economy declined, and the share of people in poverty increased . As soon as global data for this period is available, we will update this chart.

The data shows that global poverty has declined, no matter what poverty line you choose. It also shows that the majority of the world still lives on very low incomes. As we’ve seen, we can describe the same reality from the production side: the global production of the goods and services that people want has increased, but there is still not enough production of even very basic products. Most people in the world do not have access to them.

An advantage of household survey data over GDP per capita is that it captures the inequality of incomes within a country. You can explore this inequality with this chart by switching to see the data for an individual country via the ‘Change country’ button.

Measuring economic growth by tracking GDP per capita

GDP per capita is a broader measure of real income, and in contrast to survey income, it also takes government expenditures into account. A lot of thinking has gone into the construction of this very prominent metric so that it is comparable not only over time but also across countries. This makes it especially useful as a measure to understand the economic inequality in the world, as we’ve seen above. 18

Another advantage of this measure is that historians have reconstructed estimates of GDP per capita that go back many centuries. This historical research is an extremely laborious task , and researchers have dedicated many years of work to these reconstructions. The ‘Maddison Project’ brings together these long-run reconstructions from various researchers, and thanks to these efforts, we have a good understanding of how incomes have changed over time.

The chart shows how average incomes in different world regions have changed over the last two centuries. Looking at the latest data, you see again the very large inequality between different parts of the world today. You now also see the history of how we got here: small increases in production in some world regions and very large increases in those regions where people have the highest incomes today.

One of the very first countries to achieve sustained economic growth was the United Kingdom. In this chart, we see the reconstructions of GDP per capita in the UK over the last centuries.

It is no accident that the shape of this chart is very similar to the chart on book production at the beginning of this text – very low and almost flat for many generations and then quickly rising. Both of these developments are driven by changes in production.

Average income corresponds to average production, and societies around the world were able to produce very few goods and services in the past. There were no major exceptions to this reality. As we see in this chart, global inequality was much lower than today: the majority of people around the world were very poor.

To get a sense of what this means, you can again take the approach we’ve used to understand the inequality in the world today. When incomes in today’s rich countries were 20 times lower, it was as if all the prices around you today would suddenly increase 20-fold. But in addition to this, you have to consider that all the goods and services that were developed since then disappeared – no bicycle, no internet, no antibiotics. All that’s left for you are the goods and services of the 17th century, but all of them are 20 times more expensive than today. The majority of people around the world, including in today’s richest countries, live in deep poverty.

Just as we’ve seen in the history of book production, this changed once new production technologies were introduced. The printing press was an exceptionally early innovation in production technology; most innovations happened in the last 250 years. The starting point of this rise out of poverty is called the Industrial Revolution.

The printing press made it possible to produce more books. The many innovations that made up the Industrial Revolution made it possible to increase the production of many goods and services. Compare the effort that it takes for a farmer to reap corn with a scythe to the possibilities of a farmer with a tractor or a combined harvester, or think of the technologies that made overland travel faster – from walking on foot to traveling in a horse buggy to taking the train or car; or think of the effort it took to build those roads that the buggies once traveled on with the modern machinery that allows us to produce the corresponding public infrastructure today .

The production of a myriad of different goods and services followed trajectories very similar to the production of books – flat and low in the past and then steeply increasing. The rise in average income that we see in this chart is the result of the aggregation of all these production increases.

In the past, before societies achieved economic growth, the only way for anyone to become richer was for someone else to become poorer; the economy was a zero-sum game. In a society that achieves economic growth, this is no longer the case. When average incomes increase, it becomes possible for people to become richer without someone else becoming poorer.

This transition from a zero-sum to a positive-sum economy is the most important change in economic history (I wrote about it here ) and made it possible for entire societies to leave the extreme poverty of the past behind.

Conclusion: The history of global poverty reduction has just begun

The chart shows the global history of extreme poverty and economic growth.

In the top left panel, you can see how global poverty has declined as incomes increased; in the other eight panels, you see the same for all world regions separately. The starting point of each trajectory shows the data for 1820 and tells us that two centuries ago, the majority of people lived in extreme poverty, no matter where in the world they were at home.

Back then, it was widely believed that widespread poverty was inevitable. But this turned out to be wrong. The trajectories show how incomes and poverty have changed in each world region. All regions achieved growth – the goods and services that people need saw their production and quality increase – and the share living in extreme poverty declined. 19

This historical research was done by Michail Moatsos and is based on the ‘cost of basic needs’-approach as suggested by Robert Allen (2017) and recommended by the late Tony Atkinson. 20 The name ‘extreme poverty’ is appropriate as this measure is based on an extremely low poverty threshold. It takes us back to what I mentioned at the very beginning; this historical research tells us – as the author puts it – that three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.”

Since then, all world regions have made progress against extreme poverty – some much earlier than others – but in particular, in Sub-Saharan Africa, the share of people living in deep poverty is still very high.

The last two centuries were the first time in human history that societies have achieved sustained economic growth, and the decline of global poverty is one of the most important achievements in history. But it is still a very long way to go.

This is what we see in this final chart. The red line shows the share of people living in extreme poverty that we just discussed. Additionally, you now also see the share living on less than $3.65, $6.85, and $30 per day. 21

The world today is very unequal, and the majority of the world still lives in poverty: 47% live on less than $6.85 per day, and 84% live on less than $30. Even after two centuries of progress, we are still in the early stages. The history of global poverty reduction has only just begun.

That the world has made substantial progress but nevertheless still has a long way to go is the case for many of the world’s very large problems. I’ve written before that all three statements are true at the same time: The world is much better, the world is awful, and the world can be much better. This is very much the case for global poverty. The world is much less poor than in the past, but it is still very poor, and it remains one of the largest problems we face.

Some writers suggest we can end poverty by simply reducing global inequality. This is not the case. I’m very much in favor of reducing global inequality, and I hope I do what I can to contribute to this. But it is important to be clear that a reduction of inequality alone would still mean that billions around the world would live in very poor conditions. Those who don’t see the importance of growth are not aware of the extent of global poverty. The production of many crucial goods and services has to increase if we want to end it. How much economic growth is needed to achieve this? This is the question I answered in this recent text .

To solve the problems we face, it is not enough to increase overall production. We also need to make good decisions about which goods and services we want to produce more of and which ones we want less of. Growth doesn’t just have a rate, it also has a direction, and the direction we choose matters – for our own happiness and for achieving a sustainable future .

I hope this text was helpful in making clear what economic growth is. It is necessary to remind ourselves of that because we mostly talk about poverty and growth in monetary terms. The monetary measures have the disadvantage that they are abstract, perhaps so abstract that we even forget what growth is actually about and why it is so important. The goods and services that we all need are not just there – they need to be produced – and economic growth means that the quality and quantity of these goods and services increase, from the food that we eat to the public infrastructure we rely on.

The history of economic growth is the history of how societies leave widespread poverty behind by finding ways to produce more of the goods and services that people need – all the very many goods and services that people produce for each other: look around you now.

Acknowledgments: I would like to thank Joe Hasell and Hannah Ritchie for very helpful comments on draft versions of this article.

Our World in Data presents the data and research to make progress against the world’s largest problems. This article draws on data and research discussed in our topic pages on Economic Inequality , Global Poverty , and Economic Growth .

Version history: In October 2023, I copy-edited this article; it was a minor update, and nothing substantial was changed.

Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

At the time when material prosperity was so poor, living conditions were extremely poor in general; close to half of all children died .

Historian Gregory Clark reports the estimate that scribes were able to copy about 3,000 words of plain text per day.

See Clark (2007) – A Farewell to Alms: A Brief Economic History of the World. Clark (2007). In it, Clark quotes his earlier working paper with Patricia Levin as the source of these estimates. Gregory Clark and Patricia Levin (2001) – “How Different Was the Industrial Revolution? The Revolution in Printing, 1350–1869.”

There are about 760,000 words in the bible (it differs between various translations and languages; here is an overview of some translations).

This implies that the production of one copy of the Bible meant 253.3 days (8.3 months) of daily work.

Copying the text was not the only step in the production process for which productivity was low. The ink had to be made, parchment had to be produced and cut, and many other steps involved laborious work.

Wikipedia’s article about scribes reports sources that estimate that the production time per bible was even longer than 8 months.

Clark himself states in the same publication that “Prior to that innovation, books had to be copied by hand, with copyists on works with just plain text still only able to copy 3,000 words per day. Producing one copy of the Bible at this rate would take 136 man-days.” Since the product of 136 and 3000 is only 408,000, it is unclear to me how Clark has arrived at this estimate – 408,000 words are fewer words than in the Tanakh and other versions of the bible.

The data is taken from Eltjo Buringh and Jan Luiten Van Zanden (2009) – Charting the “Rise of the West”: Manuscripts and Printed Books in Europe, a Long-Term Perspective from the Sixth through Eighteenth Centuries. In The Journal of Economic History Vol. 69, No. 2 (June 2009), pp. 409-445. Online here .

Western Europe in this study is the area of today’s Great Britain, Ireland, France, Belgium, Netherlands, Germany, Switzerland, Italy, Spain, Sweden, and Poland.

On the history and economics of book production, see also the historical work of Jeremiah Dittmar.

I’ve relied on several sources to produce this list. One source was the simple descriptions of the consumption bundles that are relied upon for CPI measurement – like this one from Germany’s statistical office . And I have also relied on the national accounts themselves.

This list is also inspired partly by this list of Gwern and I’m also grateful for the feedback that I got via Twitter to earlier versions of this list. [ Here I shared the list on Twitter ]

This is Hans Rosling’s talk on the magic of the washing machine – worth watching if you haven’t seen it.

Of course all of these transfer payments have a service component to them, someone is managing the payment of the disability benefits etc.

Because smoking causes a large amount of suffering and death I do not find cigarettes valuable, but my opinion is not what matters for a list of goods and services that people produce for each other. Whether some good is considered to be part of the domestic product depends on whether it is a good that some people want, not whether you or I want it. More on this below.

Very similar to the definitions given above is the definition that Kimberly Amadeo gives: “Economic growth is an increase in the production of goods and services over a specific period.”

“Economic growth is an increase in the production of economic goods and services, compared from one period of time to another” is the definition at Investopedia .

Alternatively, to my definition, I think it can be useful to think of economic growth as not directly concerned with the output as such but with the capacity to produce this output. The NASDAQ’s glossary defines growth in that way: “An increase in the nation's capacity to produce goods and services.”

Wikipedia defines economic growth as follows: “Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.” Definitions that are based on how growth is measured strike me as wrong – just like life expectancy is a measure of population health and hardly the definition of population health. I will get back to this mistake further below in this text.

An aspect that I emphasize more explicitly than others is the quality of the goods and services. People obviously do just care about the number of goods, and in the literature on growth, the measurement of changes in quality is a central question. Many definitions speak more broadly about the ‘value’ of the goods and services that are produced, but I think it is worth emphasizing that growth is also concerned with a rise in the quality of goods and services.

OECD – Measuring the Non-Observed Economy: A Handbook .

The relevant numbers are not small. For the US alone, “illegal drugs add $108 billion to measured nominal GDP in 2017, illegal prostitution adds $10 billion, illegal gambling adds $4 billion, and theft from businesses adds $109 billion” if they were to be included in the US National Accounts. This is according to the report by Rachel Soloveichik (2019) – Including Illegal Activity in the U.S. National Economic Accounts . Published by the BEA.

Ironmonger (2001) – Household Production. In International Encyclopedia of the Social & Behavioral Sciences. Pages 6934-6939. https://doi.org/10.1016/B0-08-043076-7/03964-4

Or for some longer run data on the US: Danit Kanal and Joseph Ted Kornegay (2019) – Accounting for Household Production in the National Accounts: An Update, 1965–2017 . In the Survey of Current Business.

Helpful references that discuss how the production boundary is drawn (and how it changed over time) are: Lequiller and Blades – Understanding National Accounts (available in various editions) Diane Coyle (2016) – GDP: A Brief but Affectionate History https://press.princeton.edu/books/paperback/9780691169859/gdp

The definition of the production boundary by Statistics Finland

Itsuo Sakuma (2013) – The Production Boundary Reconsidered. In The Review of Income and Wealth. Volume 59, Issue 3; Pages 556-567.

Diane Coyle (2017) – Do-it-Yourself Digital: The Production Boundary and the Productivity Puzzle. ESCoE Discussion Paper 2017-01, Available at SSRN: http://dx.doi.org/10.2139/ssrn.2986725

A more general way of thinking about free goods and services is to consider them as those for which the supply is hugely greater than the demand.

Their production, therefore, has an opportunity cost, which means that if someone obtains an economic good, someone is giving up on something for it – this can either be the person themselves or society more broadly. Free goods, in contrast, are provided with zero opportunity cost to society.

It is also the case that the international statistics on these measures often have very low cutoffs for what it means ‘to have access’; this is, for example, the case for what it means to have access to energy.

10 years ago, Google counted there were 129,864,880 different books, and since then, the number has increased further by many thousands of new books every day.

This chart is from Jeremiah Dittmar and Skipper Seabold (2019) – New Media New Knowledge – How the printing press led to a transformation of European thought . I was unfortunately not able to find the raw data anywhere and could not redraw this chart; if someone knows where this (or comparable) data can be found, please let me know.

In the language of economists, the nominal value is measured in terms of money, whereas the real value is measured against goods or services. This means that the real income is the income adjusted for inflation (it is adjusted for the changes in prices of goods and services). Thereby, it allows comparisons that tell us the quantity and quality of the goods and services that people were able to purchase at different points in time.

I learned this way of thinking about it from Twitter user @Kirsten3531, who responded with this idea to a tweet of mine here https://twitter.com/Kirsten3531/status/1389553625308045317

We’ve discussed one such consideration that is crucial for comparability when we consider how to take into account the value of owner-occupied housing.

Whether economic growth translates into the reduction of poverty depends not only on the growth itself but also on how the distribution of income changes. The poverty metrics shown in this chart and in previous charts take both of these aspects – the average level of production/income and its distribution – into account.

Jutta Bolt and Jan Luiten van Zanden (2021) – The GDP data in the chart is taken from The Long View on Economic Growth: New Estimates of GDP, How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

The latest data point for the poverty data refers to 2018, while the latest data point for GDP per capita refers to 2016. In the chart, I have chosen the middle year (2017) as the reference year.

The ‘cost of basic needs’-approach was recommended by the ‘World Bank Commission on Global Poverty’, headed by Tony Atkinson, as a complementary method in measuring poverty.

The report for the ‘World Bank Commission on Global Poverty’ can be found here .

Tony Atkinson – and, after his death, his colleagues – turned this report into a book that was published as Anthony B. Atkinson (2019) – Measuring Poverty Around the World. You find more information on Atkinson’s website .

The CBN-approach Moatsos’ work is based on what was suggested by Allen in Robert Allen (2017) – Absolute poverty: When necessity displaces desire. In American Economic Review, Vol. 107/12, pp. 3690-3721, https://doi.org/10.1257/aer.20161080 .

Moatsos describes the methodology as follows: “In this approach, poverty lines are calculated for every year and country separately, rather than using a single global line. The second step is to gather the necessary data to operationalize this approach alongside imputation methods in cases where not all the necessary data are available. The third step is to devise a method for aggregating countries’ poverty estimates on a global scale to account for countries that lack some of the relevant data.” In his publication – linked above – you find much more detail on all of the shown poverty data. The speed at which extreme poverty declined increased over time, as the chart shows. Moatsos writes, “It took 136 years from 1820 for our global poverty rate to fall under 50%, then another 45 years to cut this rate in half again by 2001. In the early 21st century, global poverty reduction accelerated, and in 13 years, our global measure of extreme poverty was halved again by 2014.”

These are the same global poverty estimates – based on household surveys – we discussed above.

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Why it's important to understand economics.

December 1, 1998

Article Highlights

Economic literacy invaluable in communication and decision making

Econ knowledge essential to informed opinions

More focus needed in pre-college curriculum

The case for economic literacy is a strong one. George Stigler, a Nobel Laureate in economics, probably stated it best almost three decades ago when he wrote: "The public has chosen to speak and vote on economic problems, so the only open question is how intelligently it speaks and votes." In Stigler's view, economic literacy is special because it contributes to two classes of knowledge. First, it serves as a "means of communication among people, incorporating a basic vocabulary or logic that is so frequently encountered that the knowledge should be possessed by everyone." Second, it is a "type of knowledge frequently needed and yet not susceptible to economical purchase from experts."

Economic literacy certainly contributes to the first class of knowledge. People like to think and talk about the economic issues that affect them as consumers, workers, producers, investors, citizens and in other roles they assume over a lifetime. Economic literacy also gives people the tools for understanding their economic world and how to interpret events that will either directly or indirectly affect them. Nations benefit from having an economically literate population because it improves the public's ability to comprehend and evaluate critical issues. This understanding is especially important in democracies that rely on the active support and involvement of its citizens.

Economic literacy contributes to a second class of knowledge. For some economic decisions, such as buying a home or investing in the stock market, it is possible to hire professional or technical help when making a choice, but in most cases it is neither economical nor practical for an individual to hire a skilled professional every time an economic decision needs to be made. Even when such advice is given, the final choice must be made by the individual, not the adviser. What this means is that each person must ultimately serve as his or her own economist in making many economic choices, whether those choices involve buying a product, getting a loan, voting on candidates and economic issues, or something else. Economic literacy improves the competence of each individual for making personal and social decisions about the multitude of economic issues that will be encountered over a lifetime.

Economic Education

Whether there is a case for economic literacy, however, is not the most important question that needs to be answered. George Stigler and many other distinguished economists and individuals have already made that case. The more essential question to be asked is: How can we improve economic literacy in our society? Answering that question naturally turns the focus to economic education.

The development of economic literacy must begin in the schools. Even young children are capable of learning basic economic concepts that help them understand their economic world. In the secondary years, that initial foundation can be expanded to include instruction in a broader set of economic ideas and concepts. This additional education gives students greater capacity to understand more complex personal or national economic issues.

Some may think that economics is too difficult a subject to be taught to children and youth, and that such instruction should wait until college. Nothing could be more incorrect. No one would even think of making such an argument for math or science education. Waiting until students are in college to teach economics is simply a matter of "too little and too late." The majority of students end their formal education with secondary school, and even those students who continue their learning at a college or university may not take an economics course. The fact is that the best opportunity for economic education occurs before graduation from high school.

There are three essential ingredients for effective economic education in the schools. First, teachers must be knowledgeable about the subject and be able to help students learn how to use basic economic concepts to analyze personal and social issues. Second, good curriculum guides and instructional materials are needed that present economic content at an appropriate level for the student to understand. Third, economics must have a central place in the school curriculum—similar to math, science, history and language arts—so that substantial classroom time is devoted to economics instruction.

Over the past 40 years there has been a significant improvement in each area.

Teachers now have more economic knowledge because they are taking more economics courses. Instruction in economics in the classroom is more analytical and less descriptive because of the development of curriculum guides and national standards. There are now many high quality textbooks and supplementary materials for instruction. More high school graduates are completing an economics course and more instructional time is devoted to economics throughout the school curriculum.

The Evidence

Although there has been progress, much more needs to be accomplished in the coming decades if we are to produce an economically literate population. A major problem in this nation is that too few students are receiving an economic education before they graduate from high school. A study of high school transcripts shows that only about 44 percent of high school students take a separate course in economics. This course is usually offered in the 12th grade as an elective and lasts for only a semester. Although more states have made economics a required course for students, only 16 states require high school graduates to take some sort of economics course before graduation.

Given this situation—that fewer than half of high school graduates take a course in economics—it should not be surprising that study after study show that there is widespread economic illiteracy among youth and the American public. In one such study, I administered the Test of Economic Literacy , an achievement measure covering basic economic concepts, to 11th and 12th grade students nationwide and found that students supplied correct answers to less than half the questions. In another study I conducted with The Gallup Organization, I found that less than four in 10 high school seniors or adults could answer basic questions about economic terms and concepts that are essential for understanding economic events and issues reported in the news media. No matter what the economic content of questions or the test format, the study results remain the same—youth and adults show a great deal of ignorance when it comes to basic economics.

Youth are aware of their deficiencies because they give themselves low self-assessments of economic understanding in survey studies. Some 87 percent of high school seniors rated their knowledge and understanding of economic and economic issues as only fair or poor . (Among the general public, 83 percent gave the same responses.) One reason for these low self-ratings is that high school students are well aware that they are not receiving an adequate education in economics. When asked whether they were taught a lot , a little or nothing at all about how the economy works, 76 percent said that they were taught little or nothing . (Compare that percentage with the 7 percent who said they were taught little or nothing about mathematics.) In addition, both high school students and the general public had a recommendation for what should be done: Over 96 percent said the nation's schools should teach more about how our economy works.

The Consequences

The question that can be asked at this point in the discussion is "So what?" Why does it matter whether a student has taken an economics course or knows something about basic economic concepts? The answer is that economic knowledge has a direct and substantive effect on people's opinions about economic issues. This relationship can be illustrated with two examples from national survey studies.

The microeconomic example goes to the heart of support for a market economy. One knowledge question asked youth to respond to the following statement: To the best of your knowledge, the prices of most products in a competitive market, like the United States, are determined by: (a) supply and demand for products; (b) the consumer price index; (c) local, state, or the Federal government; (d) the monetary policy of the Federal Reserve. Just five in 10 youth knew that the prices of most products in a competitive market were determined by supply and demand. Two in 10 thought that prices were determined by the consumer price index. Another two in 10 believed that prices were determined by government. The remainder either thought prices were set by the monetary policy of the Federal Reserve or did not know.

Knowing what determines prices in a market economy and accepting the outcomes are two different things. If demand or supply conditions change, prices in a competitive market will rise and fall. Having a basic understanding of how markets work does not always mean that people will like price changes, especially if prices rise, but it should increase the probability of accepting the market outcome.

An opinion question was also asked to probe the degree of support among youth for the operation of competitive markets: A bicycle manufacturer raises the price of bikes because the demand increased even though the cost of producing bikes has not increased. Do you think the manufacturer should be allowed to raise prices? Two-thirds of youth said they were opposed to allowing the bike manufacturer to raise prices, which is certainly not a ringing endorsement of competitive markets. In fact, there are many examples of businesses raising prices based on increased demand. The prices for seasonal clothing are higher at the beginning of the season than at the end. Airfare rises in peak travel periods. Auto dealers raise prices (or give fewer discounts) when particular models become popular.

When you cross-tabulate the responses to the economic knowledge and opinion questions, a distinct pattern emerges. Among youth who knew that supply and demand determined the prices in a competitive market, 60 percent would allow the bike manufacturer to raise prices. Among youth who gave an incorrect response to the knowledge question, only 41 percent thought the bike manufacturer should be allowed to increase prices. The differences in the percentages show that what many youth know about how markets work directly affects their acceptance of the market result.

For a macroeconomic example, the basic economic question was: What is an example of monetary policy? Would it be a change in: (a) the discount rate; (b) a change in Federal government spending; or (c) a change in corporate profits. Only 17 percent of high school students knew that a change in the discount rate was an example of a change in monetary policy. About four in 10 thought it was a change in government spending (fiscal policy), about two in 10 thought it was a change in corporate profits, and another two in 10 did not know.

Although most high school students were ignorant of what monetary policy was, they were quite willing to give their opinion on this monetary policy question: Who should set monetary policy? Should it be: (a) the President; (b) the Congress; (c) the Federal Reserve; or (d) the United States Treasury? This issue is important because it determines whether there will be an independent central bank, isolated from direct political pressure, that can effectively control the money supply and maintain price stability. Only 16 percent of youth thought the Federal Reserve should be responsible for setting monetary policy.

When responses from the monetary policy knowledge and opinion questions were cross-tabulated, they show that there were significant differences in the support for the Federal Reserve having control over monetary policy in the United States based on the respondent's correct or incorrect responses to the knowledge question. Among high school students who could give a correct example of a change in monetary policy, 32 percent thought it should be set by the Federal Reserve, but among high school students who gave incorrect examples only 15 percent thought that monetary policy should be set by the Federal Reserve.

Similar cross-tabulations of opinion and knowledge questions on such topics as unemployment, the federal budget, economic growth, profits or trade protectionism could be performed with survey data to demonstrate the same point. Survey data have also been collected from the general public on these topics and the cross-tabulations show the same patterns as those for youth. The survey findings clearly indicate that what youth and adults know about basic economics affects what they think about an economic issue. What is especially disturbing is that people who have no basic knowledge about an economic issue are quite willing to state an opinion on that issue. This knowledge deficiency affects people's ability to evaluate economic matters and produces uninformed opinions. Among the informed, of course, there will still be differences about what should be done on an issue, but it provides a solid basis for a reasonable discussion of economic alternatives.

The development of basic economic literacy is an important goal for a democratic society that relies heavily on informed citizenry and personal economic decision-making. To achieve that goal will require that significant gaps in the economic education of youth be closed by giving economics a more central place in the school curriculum. More economics coursework at the precollege level sets a foundation for economic literacy, but it is only the beginning. As George Stigler reminded us long ago: "We shall have to combine vast efforts and creative experimentations if we are to produce the first economically literate society in history."

Stigler, George J. (1970). "The Case, if Any, for Economic Literacy," Journal of Economic Education , 1:2, 77-84.

Walstad, William B. (ed.). (1994). An International Perspective on Economic Education . Boston: Kluwer Academic Publishers.

Walstad, William B. (1996). "Economic Knowledge and the Formation of Economic Opinions and Attitudes." In P. Lunt and A. Furnham (eds.), Economic Socialization: The Economic Beliefs and Behaviours of Young People (pp. 162-182). Cheltenham, UK: Edward Elgar.

Walstad, William B. (1996). Youth and Entrepreneurship . Kansas City, MO: Kauffman Center for Entrepreneurial Leadership, Inc.

Walstad, William B. (1997). "The Effects of Economic Knowledge on Public Opinion of Economic Issues," Journal of Economic Education , 28:3, 195-205.

Walstad, William B. and Larsen, M. (1992). A National Survey of American Economic Literacy . Lincoln, NE: The Gallup Organization.

Walstad is director of the National Center for Research in Economic Education and Edwin Faulkner Professor of Economics at the University of Nebraska-Lincoln. Since 1992 he has been associate editor of the Journal of Economic Education and is a past president of the National Association of Economic Educators. Walstad, who is the author of several hundred scholarly works in economic education, is also well known for his national assessments of economic understanding and prepared a report on American economic literacy with The Gallup Organization in 1992.

Walstad received his doctorate in economics from the University of Minnesota and served on the economics faculty at the University of Missouri-St. Louis prior to coming to Nebraska.

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Guide to Microeconomics

How Microeconomics Affects Everyday Life: Renting an Apartment

Learn to make the best use of limited resources

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Microeconomics is the study of how individuals and businesses make choices regarding the best use of limited resources. Its principles can be usefully applied to decision-making in everyday life—for example, when you rent an apartment. Most people, after all, have a limited amount of time and money. They cannot buy or do everything they want, so they make calculated microeconomic decisions on how to use their limited resources to maximize personal satisfaction.

Similarly, a business also has limited time and money. Businesses also make decisions that result in the best outcome for the business, which may be to maximize profit.

The field of microeconomics interests investors because individual consumer spending accounts for roughly 70% of the U.S. economy. Microeconomics and macroeconomics (the study of the larger aggregate economy) together make up the two main branches of economics.

Key Takeaways

Microeconomics uses a set of fundamental principles to make predictions about how individuals behave in certain situations involving economic or financial transactions.
These principles include the law of supply and demand, opportunity costs, and utility maximization.
Microeconomics also applies to businesses.

Some Principles of Microeconomics

Before using microeconomics to understand its use in renting an apartment, it helps to understand some fundamentals. Microeconomics uses certain basic principles to explain how individuals and businesses make decisions. These are:

Maximizing utility —Maximizing utility means that individuals make decisions to maximize their satisfaction.
Opportunity cost —When an individual makes a decision, they also calculate the cost of forgoing the next best alternative. If, for instance, you use your frequent flier miles to take a trip to the Bahamas, you will no longer be able to redeem the miles for cash. The missed cash is an opportunity cost .
Diminishing marginal utility — Diminishing marginal utility , another economic input, describes the general consumer experience that the more you consume of something, the lower the satisfaction you get from it. When you eat a burger, for example, you may feel very satisfied, but if you eat a second burger, you may feel less satisfaction than you experienced with the first burger.
Supply and demand —Two other important economic principles are supply and demand as they appear in the market. Market supply refers to the total amount of a certain good or service available on the market to consumers, while market demand refers to the total demand for that good or service. The interplay of supply and demand helps determine prices for a product or service, with higher demand and limited supply typically making for higher prices.

The amount of the U.S. economy accounted for by consumer spending

Applying Microeconomics to Renting an Apartment

To help understand how microeconomics affects everyday life, let’s study the process of renting an apartment. In New York City there is a limited supply of housing and high demand. This explains why housing costs in New York are high, according to the principles of microeconomics just outlined.

Maximizing utility

To rent an apartment, first you must determine a budget. For this you will have to take into account your income and how much money you are looking to spend on housing, in such a way as to maximize your utility or satisfaction. If you allocate too much of your income to rent, you will limit the money you have left for other expenses. Thus, you will have to decide what amount of money is the maximum you are willing to part with for rent, what amenities you must have in your apartment, and which neighborhoods are acceptable to you. All of these decisions and calculations are about maximizing utility.

Opportunity cost

Based on all the above factors, you set a budget to get the most satisfaction for the least possible rent. You will not pay more than you have to in order to get what you want. Given that in this supply-constrained market there are others also interested in renting the more in-demand apartments, you might find that you will have to increase your budget. To do this you will have to cut down on spending in another area, such as entertainment, travel, or eating out. That is the opportunity cost of finding the right apartment.

Supply and demand

Similarly, a landlord will seek to rent an apartment at the highest price possible, as their motivation generally is to get the best return from renting out the apartment. In setting the rent, the landlord would have to take into account the demand for the apartment in that specific neighborhood. If there are enough potential renters interested in the apartment, the landlord would set a higher rent. If the rent is set too high, compared with what other landlords in the neighborhood are charging for comparable apartments, renters will not be interested. Thus the business owner, in this case the landlord, also makes decisions based on supply and demand.

And while the landlord would attract a larger pool of prospective renters by setting a rent that is lower than what other neighborhood landlords are charging for comparable apartments, they would be missing out on some rental income, which will not maximize their utility. Thus, both you and the landlord will make decisions to get the best outcome for yourselves given the constraints you face.

The Bottom Line

In a capitalist economy, both consumers and businesses make thousands of big and small decisions each year guided by microeconomic issues. Consumers seek to maximize their satisfaction when they go out and shop for anything from paper towels to apartments, houses, and cars. Businesses set prices and make other decisions based on microeconomics. The prices that consumers will pay depends on the supply of a specific good, such as an apartment, as well as how much others are willing to pay for it.

Bureau of Economic Analysis. “ National Income and Product Accounts Tables ," Download "Table 1.1.6. Real Gross Domestic Product, Chained Dollars."

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CfP - Workshop 'Everyday Questions', Naples 5-6 December 2024

Call for Papers:

International Hybrid Workshop

Everyday Questions. Gender, Economic, and Cultural Practices in Maritime Early Modern and Modern Everyday Life (17th–20th centuries)

Naples (Italy) and online, 5–6 December 2024

CfP deadline: 15 September 2024

Organisers :

NextGenerationEU Project ‘ Ondine ’ (Dep. History, Humanities and Society – Tor Vergata University of Rome) ;
Institute of History of Mediterranean Europe of the Italian National Research Council ( ISEM-CNR ).

Dates and location : Naples, 5–6 December 2024 at Fondazione Banco di Napoli, and remotely

Languages : English and Italian

Under the patronage of : Istituto Nazionale Ferruccio Parri and Fondazione ISEC

The workshop aims to highlight the multifaced and dynamic nature of gendered, economic, and cultural practices in everyday life in maritime contexts in Early Modern and Modern times (17th–20th centuries).

The analytical tools for studying everyday life are manifold. What all approaches and methodologies have in common is that they operate as critiques of everyday life. In other words, all possible approaches have to analyse the ‘structures of the everyday’ (Braudel 1967, 1979) and/or how it was experienced and produced over time more than the everyday itself (Olson 2011).

The first to introduce the concept of everyday – precisely the notions of routine and repetition – into historiography was Braudel (1967, 1979), who through his ‘historical imagination’ emphasised what he called ‘material civilisation’, i.e. the ways that women and men had of producing, exchanging, eating, living, and reproducing at the dawn of capitalism.

Braudel’s approach found inspiration in Lefebvre’s Critique de la vie quotidienne , vol. I (1947) and Matérialisme dialectique (1949), the works in which the French philosopher recognised daily life as the place par excellence of production – of a material, social and cultural nature – and appropriation . In this sense, everyday life becomes the battleground – or mediation ground – among nature, capitalism and human beings. It is also where individuals articulate (i.e. appropriate) themselves (Lefebvre 1947, 1949, 1961).

During the 1980s in West Germany, the historiographical investigation of everyday life experienced a new impetus. The Alltagsgeschichte (Lüdtke, Medick) sprouted from the will to analyse the lives and survival strategies of the ‘nameless’ multitudes, the aspirations and everyday struggles of the kleine Leute (little/ordinary people) (Lüdtke 1989), the ‘peoples without history’ (Wolf 1982) or those ‘left behind’. This specific approach of ‘history from below’ principally aims to harmonise the micro and the macro levels of analysis by relating the everyday experiences of ordinary people with the major configurations/transformations of a political, economic, and social nature. On those bases, Alltagsgeschichte interprets human practices and experiences as inseparable from the context in which they originated. Moreover, since the everyday is the space of individuals’ articulation , any aspect of human practice in the everyday is a cultural matter.

As for gender aspects, we know that it is the everyday that makes ‘feminine women’ and ‘masculine men’ (Holmes 2009). Moreover, since there is almost an automatism in the association between the everyday and ‘women’s affairs’ and experiences, often women’s (daily) activities are considered trivial and oversimple, thus not worthy of analysis or interpretative effort (Lefebvre 1961; Randal 2008). In maritime social contexts, the issue is further complicated. If, on the one hand, in the last forty years, historiography has recognised the value of domesticity and female (re)productive contribution in fishing communities (Thompson et al. 1983; Norling 2000), on the other, port cities continue to be considered ‘normal’ strongholds of masculinity and male (economic, social, and cultural) production.

Given the premises, we are soliciting proposals that deal with:

Economic practices in maritime environments (e.g. labour, business, and consumption); abstracts with a gender focus (i.e. history of women, masculinities, and LGBTQ+ communities) will be given priority;
Gender relations and production in maritime contexts ; abstracts with an economic focus (i.e. labour, business, consumption, household management, and care of the person) will be given priority;
(Pop) Representations and narratives of everyday maritime life (e.g. exhibitions, festivities, documentaries): abstracts with a gender and/or economic angle will be given priority.

Moreover, we would particularly welcome:

Proposals based on ‘non-official’ historiographic sources (e.g. paintings, photographs, comics, films, songs, etc.);
Proposals that focus on gender, economic and cultural practices in imperial/colonial city-ports;
Proposals from scholars from disciplines other than history (e.g. anthropology, sociology, economics).

Please send your 20-minute presentation proposal to Erica Mezzoli at [email protected] by 15 September 2024 . The proposal should include:

- max 300-word abstract in English ;

- max 250-word bio profile in English with affiliation, position and contact information;

- the language the proponent would prefer to communicate: Italian or English;

- the modality the proponent would prefer to communicate: in person in Naples or remotely.

The workshop is organised in the framework of the NextGenerationEU Project ‘Ondine. Women’s Labour and Everyday Life on the Upper and Eastern Adriatic Waterfronts, mid-19th century–mid-20th century’ (Funded by EU; CUP E53C22002420001) hosted by the Department of History, Humanities and Society of the Tor Vergata University of Rome.

Erica Mezzoli

NextGenerationEU Project 'Ondine' - Dep. SPFS, Tor Vergata University of Rome

[email protected]

Chaos and Confusion: Tech Outage Causes Disruptions Worldwide

Airlines, hospitals and people’s computers were affected after CrowdStrike, a cybersecurity company, sent out a flawed software update.

Share full article

A view from above of a crowded airport with long lines of people.

By Adam Satariano Paul Mozur Kate Conger and Sheera Frenkel

July 19, 2024

Airlines grounded flights. Operators of 911 lines could not respond to emergencies. Hospitals canceled surgeries. Retailers closed for the day. And the actions all traced back to a batch of bad computer code.

A flawed software update sent out by a little-known cybersecurity company caused chaos and disruption around the world on Friday. The company, CrowdStrike , based in Austin, Texas, makes software used by multinational corporations, government agencies and scores of other organizations to protect against hackers and online intruders.

But when CrowdStrike sent its update on Thursday to its customers that run Microsoft Windows software, computers began to crash.

The fallout, which was immediate and inescapable, highlighted the brittleness of global technology infrastructure. The world has become reliant on Microsoft and a handful of cybersecurity firms like CrowdStrike. So when a single flawed piece of software is released over the internet, it can almost instantly damage countless companies and organizations that depend on the technology as part of everyday business.

“This is a very, very uncomfortable illustration of the fragility of the world’s core internet infrastructure,” said Ciaran Martin, the former chief executive of Britain’s National Cyber Security Center and a professor at the Blavatnik School of Government at Oxford University.

A cyberattack did not cause the widespread outage, but the effects on Friday showed how devastating the damage can be when a main artery of the global technology system is disrupted. It raised broader questions about CrowdStrike’s testing processes and what repercussions such software firms should face when flaws in their code cause major disruptions.

How a Software Update Crashed Computers Around the World

Here’s a visual explanation for how a faulty software update crippled machines.

How the airline cancellations rippled around the world (and across time zones)

Share of canceled flights at 25 airports on Friday

50% of flights

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Dhaka Shahjalal

Minneapolis-Saint P aul

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Melbou r ne

Be r lin B r anden b urg

London City

Amsterdam Schiphol

Chicago O'Hare

Raleigh−Durham

B r adl e y

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Reagan National

Philadelphia

1:20 a.m. ET

CrowdStrike’s stock price so far this year

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Economics of Daily Life Essay
Economics of Daily Life Essay. Economics is a study of how society manages its scarce resources. The literal translation for economy is "one who manages a household." "In an increasingly complex world connected by social and economic interaction and interdependence, news of stock market fluctuations, consumer confidence scores, and ...
Importance of Economics in Daily Life Free Essay Example
In this course, we learned a variety of economics concepts, such as, Supply and Demand, Types of Goods and Markets, Government Policy and International Trade, Labor Markets, Wages and Income, Measuring Economic Health, Federal Reserve and Fiscal Policies, Economic Analysis. The importance of these concepts and tools for an economist is ...
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Here's a look into the importance of microeconomics and how individuals use this theory in the case of leasing an apartment from a landlord.
CfP
The workshop aims to highlight the multifaced and dynamic nature of gendered, economic, and cultural practices in everyday life in maritime contexts in Early Modern and Modern times (17th-20th centuries). The analytical tools for studying everyday life are manifold.
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Essay on Economics Importance In Daily Life

100 Words Essay on Economics Importance In Daily Life

Economics in Daily Life

Economics and Future

250 Words Essay on Economics Importance In Daily Life

Economics in Business

Economics in Society

500 Words Essay on Economics Importance In Daily Life

Economics in our Daily Lives

Economics and Saving

Economics in Resource Allocation

Economics and Jobs

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How Does Economics Affect Our Daily Lives?

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1.1 What Is Economics, and Why Is It Important?

Introduction to FRED

The Problem of Scarcity

The Division of and Specialization of Labor

Why the Division of Labor Increases Production

Trade and Markets

Why Study Economics?

1.1 What Is Economics, and Why Is It Important?

The Problem of Scarcity

The Division of and Specialization of Labor

Why the Division of Labor Increases Production

Trade and Markets

Why Study Economics?

Share This Book

1.1 What Is Economics, and Why Is It Important?

What is a good and what is a service?

The Problem of Scarcity

The Division of and Specialization of Labor

Why the Division of Labor Increases Production

Trade and Markets

Why Study Economics?

Key Concepts and Summary

Self-Check Questions

Review Questions

Critical Thinking Questions

Share This Book

Economics in Everyday Life

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