This is part two of what UPS professors and students thought were “the most useful ideas in economics.” These next two responses were not popular answers given, however, I think that they are interesting, and may help explain more about economics in the world setting.
A more interesting response I received from a student who took law and economics was the idea of transactions costs. A transaction cost is any cost incurred when participating in a market. It is all the costs incurred when you buy or do something. An example from law and econ is legal fees, but a more practical transaction cost we all complain about when we fill up our gas tanks is transportation costs. When people go to the store, most don’t realize that there are more costs than just how much it costed for them to get groceries. There’s the transportation costs of driving to go get groceries, the opportunity costs of doing something other than getting groceries, etc. Many people do not realize there are more costs they deal with on a daily basis than just the costs of goods, and many of these underlying costs are what drive many decisions in daily life.
Out of the three ideas previously stated in part 1 and 2, Opportunity cost and Comparative advantage were what I received as the most popular answers to my question. Transactions costs is somewhat similar to both of those ideas, even though it brings up a different viewpoint. The last answer to my interview question was the most obscure when you look at it face on but, if you take a wider view, it becomes a very important lesson that drives everything we carry out in the modern day.
That would be what theories were created due to the Great Depression. Now many people are thinking: how does this apply to daily life? The Great Depression led to the creation of the Keynesian economics, which impacts much of the policies we live by in the present day. Keynes believed that free markets do not have the ability to stabilize prices and achieve full employment. This means that government policy and intervention in the economy through taxes and government spending is needed to achieve what free markets are unable to. Also, his theory puts a large emphasis on aggregate demand, which in simple terms, is spending by the government, households (consumers), and businesses. Changes in these areas lead to changes in prices as well as output, commonly stated as GDP.
Now if you are not an economist you may be asking, why is Keynes’s work so important? The simple answer is that his work done after the Great Depression is what economists use to analyze government policy, and what is going to happen to all markets in the United States and abroad. This theory of economics is what connects us all together. It’s the reason why we have people fighting over tax cuts and talking about federal debt. It’s why things like the present day coronavirus or trade war with China are so important. They all affect our daily lives in one way or another. One example of this is the impact of interest rates changes. Due to recent coronavirus fears, rates got cut by the Fed, which is having an impact on housing the market. Many people have been refinancing their mortgages in order to get better deals, and pay less every month. This impact on housing was due to a macroeconomic policy implemented through a government entity. That is what is inside the Keynesian playbook, and it affects us in all sorts of ways.
These are just four different concepts from economic theory and there are so much more that are used to explain how we all make decisions in our daily lives. Will we ever know what the most important idea is in economics? Probably not, but providing insight on how people can use economics in their lives or the basics of how economic theories explain consumer, firm, and government behavior is important. Personally, I hope these last two posts provide some insight into the usefulness of economics, and I hope to see more people starting to look at the world through more of an economic lens.
I am a die hard follower of Keynesian Economics. In spite of the deluge of criticism hurled at the efficacy of his theories , I strongly believe, that his prescription of revival of economy in times of depression has stood the test of times.
Regarding applying the concepts of economics to every day life, yes the beauty of the subject lies in its practicality, it is not Utopian. Concepts of consumer’s surplus, demand theory, theories of consumption, such as Duesenberry hypothesis and a host of other theories can relate to real world situations