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Basic economic principles guide everyday life decisions

By Ann Koblenzer
On March 27, 2009

People often ask me why I'm an economics major. Friends, family and interviewers often ask me, "Why economics?" They question my desire to study theories that don't always have the empirical evidence to support them. My mother asks me how I look at supply and demand graphs without falling asleep. My answers to their inquiries vary depending on the day, and I definitely have moments when I, too, question my decision.

When I told my parents I was going to be a journalist, my dad responded, "Oh, really? How are you going to pay the bills, kid?" He told me I needed to differentiate myself. This great man of reason reminded me I wasn't going to get a job just because I could write-lots of people can write. I needed to make myself unique.

That is where economics came in. I took advanced placement macroeconomics in high school and loved the challenge. It also helped that the class gave me the opportunity to be smarter than the boys and prove girls could understand business just like the guys.

Everyone has moments that test their confidence, rattle their plans and make them question their desires. For me, it was a professor telling me I didn't have what it took to be an economics major. This professor politely suggested I may not be suited for this type of major because some people's brains just don't think with the correct mindset for economics.

But this professor was wrong. Economics isn't some abstract concept that is impossible to apply to the real world. The big words, the graphs and the empirical evidence can be overwhelming, but my appreciation for this major has only grown since that horrible day in office hours. I have learned how to apply the concepts to life and that has made all the difference.

You can't make good decisions based on poor information and that has been the driving force behind my desire to continue in my major. If this current economic situation has taught us anything, it is that everyone needs to have a basic understanding of the economy. Economics (and life) is about resource allocation decisions. You will make poor decisions if they are based on wrong information.

These decisions in economics, and more importantly, life, can be made by equating marginal cost and benefit. The marginal cost is the cost of producing one more and the marginal benefit is the gain from producing one more. Companies look at this every day, but so does the average Joe. You gauge the decision of increasing the time you spend studying on the potential improvement in your grade.

The theories of compliments and substitutes can also boil down to a very easy to understand example. Skipper's waffle fries are the perfect companion for a dollar draft-the ideal compliment. When at a party that has Bud Light and Miller Light, it probably wouldn't matter too much which one you were offered. That's because they are substitutes for each other-both serve the same overall purpose.

Then there is the theory of diminishing marginal returns, and for this theory, Thanksgiving dinner is the perfect example. That first plate of food is perfect, and you gain a high utility from every bite. You go back for the second plate, and it is still enjoyable, but then you talk yourself into a third. Hey, this holiday only happens once a year. The enjoyment (utility) gained from that plate is significantly less than the first one. The returns have diminished.

This is only scratching the surface of the many possible ways you can apply economic theories to your life. So to all the first-years and sophomores struggling through the introductory classes and cursing the theories, by making theories more accessible it can become a little less overwhelming. And to the juniors and seniors who have never stepped inside Laws Hall, why not fill some of those extra hours with an economics class now that individual exercise is no longer an option?

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