Economics in daily life
Introduction
I recently took the Microeconomics course on Coursera and found it useful. As part of the course, we were given some practice questions related to applying economics in daily life. In this article, I have listed these practice questions and my answers to the questions.
According to Wikipedia: Economics is the social science that studies how people interact with value; in particular, the production, distribution, and consumption of goods and services. In this article I will discuss some daily life applications of Economics.
Economics in your daily life
According to Wikipedia: Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money.
Background
Many of the concepts we will be discussing this semester should apply to your daily life, including the ones we talked about this module. This discussion question gives you a chance to begin exploring economics in your daily life.
Discussion Question
Give at least 2 examples of any of the concepts we introduced this module that you observe in your daily life. Try to be very specific describing the examples, and also describe how the economic principle applies to your examples.
Answer
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I have tomatoes. I have to eat them every day, so I dont like them very much. My friend has milk cream. She also has to eat it every day and is tired of having it. I like milk cream and my friend likes tomatoes. If I give some tomatoes to my friend and she gives me some milk cream, then we would both be happy with the trade.
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I buy the same food from the same shop every few days. I am used to paying the same price for the food. Suddenly the price of one of the food items, x increases by 100%. This is very disturbing because I have a fixed budget and have to allocate money for other routine tasks. What should I do?. I decided to switch from buying the food item x to buying the food item y which is cheaper than x but has the same value in terms of taste. However y is less nutritious than x. I am less concerned with nutrition, so I decided to buy y. y costs about the same as x did few days back from the price increase. So the marginal cost of switching from x to y is small. The cost from switching from x to y is that I lose some nutritional benefits of x.
Visual Economics
Background
A picture is worth a thousand words. I truly believe this is true. Not only can a picture more easily describe a concept, but the process of finding that picture can also be a good learning experience.
Discussion Question
Find 1 picture (photograph) that represents any of the 4 principles we introduced this module. Along with your picture, post a brief description of how this photograph is a good representation of the principle in action.
Answer
The outcome of trade is that both parties benefit from it. The picture illustrates this concept.
What is the opportunity cost of going to college
According to Wikepedia: Opportunity cost is the loss of the benefit that could have been enjoyed if the best alternative choice were chosen instead. Directly or indirectly, opportunity cost underpins the majority of day-to-day economic decisions that are made in society.
Discussion Question
Please list the 2 largest opportunity costs of obtaining a 4-year degree (assume you must go to college full time to get this degree). Now, use 1 of these costs to explain the following trend: When the unemployment rate increases, enrollment in college also increases, and vice-versa.
Answer
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You are not able to stay at home and look after family members or socialize with general public. Your circle of friends becomes exclusive.
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The money spent on going to college, may be spent on other resources.
When the unemployment rate increases, fewer people are working and more are spending time at home with their families. When people are forced to stay at home with family, they start getting used to being at home and are more willing to go out and explore new opportunities such as going to college.
When enrollment in colleges increases, a lot of people spend a lot of time behind books and in class rooms. In a sense, they become isolated from the rest of society and are not able to participate in activities that add value to society. If value is not being added, then there are fewer opportunities for people, which may result in an increase in the unemployment rate.
When the unemployment rate increases, people are not encouraged to spend on non essential products and services. This may encourage them to spend on college.
When enrollment in college increases, people spend a lot on college tuition, so there is less money for other resources. Because there is not enough money, there are less opportunities for people to work, which can lead to an increase in unemployment.
When Does the Invisible Hand NOT Work
According to Wikipedia: The Invisible Hand is an economic concept that describes the unintended greater social benefits and public good brought about by individuals acting in their own self-interests.
Background
One of the principles we introduced this module is the invisible hand principle: society generates the most welfare when individuals try to maximize their individual interests. As many economists point out, this principle requires good societal institutions in order to work. When institutions do not work correctly, what we have is sort of an invisible foot. So here is the question:
Discussion Question
Please describe a situation in which the invisible hand does not seem to work. Then explain why the principle does not work and what would need to happen for it to work.
Answer
It is common for people to want to increase the amount of money they have in the bank. But if there are no opportunities for spending this money, then it becomes useless. It may even become a burden on society, since interest in payed on the money in the bank account. In many cases, the money in the account holders bank account increases automatically, without the knowledge or explicit consent of the account holder.
The individual may think that his interest is being served, but society as a whole will probably not benefit, because simply transferring money to a users account, without the knowledge or consent of the account holder will not create any value. So it would seem that the invisible hand principle does not work in this case.
To make it work in this case, the banking institutions should transfer money to and from an account after investigating the activities of the account holders. One way to achieve this is to allow the banking transactions to take place, but only finalize the transaction after the activities that led to the transaction have been investigated. The banking institutions should collaborate with other social institutions in this regard.
Another option is to create specialized accounts that serve the needs of different types of account holders. It would be also useful if the banking institutions engage with their customers on a personal level and try to find spending opportunities for their customers. In this way the customers will be happy and society as a whole will benefit because of creation of value, that should result from the customers spending.
What is the Best Way to Teach a Coursera Course
Background
One of the questions we discussed this module was what would be the best way to teach a Coursera course. Since my time is a limited resource, and since there are more than one way of distributing this limited resource, this is a classic example of the economic problem. In our lecture we listed the following three possible distribution schemes:
- I teach the class for free to as many students as sign up (this is the way it is done right now).
- I teach the class for free to just a few students who pay the most. Assume that either Coursera and/or the University get the money from the participants, while I teach the course “pro-bono” or free.
- I choose a few students at random and teach the class to those students for free.
Discussion Question
Choose which 1 of the 3 distribution schemes that you think is the best. Then, clearly discuss why you think this is the best way to distribute the limited resource. In your answer, please also discuss the pros and cons of the 3 distributions schemes.
Answer
- Con: If you teach the class for free for all students, then some students may not be motivated to study since they are not paying. Also Coursera and the instructor would not benefit financially, since they are offering a service for free.
Pro: If you teach the class for free for all students, then a lot people benefit from excellent teaching material. This will result in fewer social problems and higher employment. Specially useful in developing countries.
- Con: If you teach the class for free to just a few students who pay the most, then a lot of people who dont have the money but are motivated to study will not be able to study.
Pro: Coursera will earn money for their service.
- Con: If you teach the class for free to a random students, then not all students will benefit from the class. Some motivated students may be left out. Also Coursera and the instructor will not make any money.
Pro: Some motivated students who are not able to pay the fees will be able to study. But only if they are lucky.
Is it Better to Study in Groups
Background
Many education researchers are discovering the benefits of studying in groups. Yet for an economist, this should have been obvious…or is it?
Discussion Question
Explain the economic benefits of studying in a group versus individually. Please try to offer a specific example to demonstrate your arguments. For instance, would it be better for you to study with another person for the first exam of this class? If so, how many students would be a good number of group partners? Why might the benefits of adding more partners to the group decrease as more partners are added the group?
Answer
The main benefit of studying in a group is that it allows people to share their different views and opinions on a topic. This should improve the students understanding of the topic. I think before studying in a group, the students should first go over the course material individually. Three or four would be a good number of group partners. I think that if more group members are added, students become more distracted since there is a large number of other group members they need to think about. Also students may get over-whelmed if they need to consider too many points of view on a topic.