The importance of (micro) economics

The subject of economics is a valuable and important one. Concepts such as cost benefit analysis, economic rent, consumer surplus and opportunity cost help to make sense of the unorganized world and make decisions about how we are going to respond to it.

1. Cost benefit analysis allows us to accurately interpret claims made by politicians and recognize the reasons why a particular group is angry or holds a particular point of view. Basically, if someone is against an idea they always raise its disadvantages (costs) and if they are in favor of the idea they raise all of its advantages (benefits). We as individuals need to sit back and think to take both sides of the story into account. Cost benefit analysis is the tool which lets us do that.

In his brilliant book "The Economics of Life", Gary S. Becker puts the case for using cost benefit analysis widely very strongly: "Everyone recognizes that most people respond to costs and benefits in deciding how much to buy of simple goods such as fruit, clothing, or a car. I claim that this common-sense idea applies to all human decisions." (McGraw-Hill, 1997).

2. Economic rent helps justify why branders earn more than rankers: they may earn more themselves because they also earn their companies more.

3. Consumer surplus describes how even if the price of something appears high, as long as the customer derives greater satisfaction and value than the price paid, they will be willing to pay that price. If I value a can of Coca-Cola at 99 cents and only pay 50 cents then my consumer surplus is 49 cents- the difference between what I would have paid and what I actually paid. The secret is to never charge a consumer more than their surplus- because they will never rationally pay more.

4. Opportunity cost justifies focusing on activities which you do best and getting and letting others concentrate on what they are good at. Get someone in to do your do-it-yourself work if you are a knowledge worker better with your head than with your hands.

The subject of economics has had a lot of bad press in the recent past. The word is that if you laid all the economists in the world end to end, you might just get an accurate predication: but don’t bet on it as they are all likely to have a different opinion. Diversity in opinion is of course a very positive thing. Much of the criticism of economics is that it has focused on ever more theoretical models and mathematical equations.

In fact, the discipline of economics is typically split into two parts: micro and macro economics. Macro deals with the economy as a whole from the government’s perspective. Micro deals with economic topics from an individual’s point of view. Macro concerns inflation, government spending, taxation levels and such like. Micro is all about the sorts of concepts discussed above.

It is macro economics which is getting economics a bad name. As ever, the complicated unorganized word cannot be understood and controlled by government officials or anyone: diverse and multiple market transactions are too complex when taken as a whole for governments to dictate the course of.

Micro economics on the other hand is of great use every day, in fact, in every decision when individuals are making their choices. It is therefore of great significance, and I would certainly include it in my "Curricula Unorgana" as a core subject which everyone should learn the basics about.

Author: Simon Buckingham

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