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Why Do We Learn Economics? | The Basic Principles Explained
Have you ever read the book ‘Freakonomics’? If you have, you would have seen how Economics can be applied to everyday life (not just the economy).
In the book, the author tries to explain why sumo wrestlers might cheat using ‘rational choice’. This assumes that each person’s decisions are calculated to produce the best possible outcome.
How and why does a sumo wrestler cheat?
Consider 2 sumo wrestler friends
They are both competing in a tournament
One of them has already qualified for the next round of the tournament
It’s rational for this friend to let the other one win (as it benefits his friend, which benefits him)
This is just one example, but really there are plenty of other examples to explain different scenarios.
But why would a sumo wrestler cheat? Imagine that two sumo wrestlers are facing each other in a match. They also happen to be best friends. However, since one has already qualified for the next tournament, it’s rational for him to lose on purpose to increase the odds that his friend advances.
This is merely one example. In fact, economic theories have been used to describe a whole host of phenomena.
But we shouldn’t forget why study Economics - to study how the economy works. One of the areas we study is money.
What is money? Money is essentially the measurement of what society owes you (generally for your labour). These ‘work done’ tokens are essentially symbols of output. However, sometimes money isn’t given away in exchange for work; sometimes it is given away for free e.g. a transfer payment to a charity.
Once earned, money can be used toward the consumption of goods and services. These are produced by firms: organisations which combine specific inputs (land, labour and capital) to form outputs.
These are the core components of why we study Economics, and why we develop economic theory.
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