You don’t need to be an expert economist or have a degree in economics to understand the basic principles of economics that can be seen everywhere in everyday life. Think about what you know about economics right now, then do the same after you read this article. I daresay you’ll surprise yourself. Sure, all the theory and law behind the science is usually pretty boring, but the introductory economics are absolutely necessary if you want to have any understanding of things you encounter every day, as well as in any economics class. In about 15 minutes, or however long it takes you to read this article, you’ll be on your way to becoming an armchair economist.

What is Economics?

The US economy? The UK economy? Gross Domestic Product? International trade? Finance? Well, yes and no, but mostly no. The term economics refers to somewhat of an abstract concept: the fact that humans are generally rational, and we make choices. Economics attempts to explain and investigate the how and why behind those choices. Economics can also usually answer the other interrogatives as well (who, what, when, where, and how much). Our world is full of hows and whys that spark curiosity, and that economics is about recognizing this and attempting to solve them in a manner that is consistent with the assumption that humans behave a certain way for a reason. In some cases, this can be called sociological economics or psychological economics. Attempting to solve these mysteries is made easier with the use of assumptions and models, which I’ll get to later. There may never be an absolute solution to a particular mystery, but proposing some ideas based soundly on the principles of economics doesn’t hurt.

A real-life example that illustrates the answering of the aforementioned “interrogatives”

Yesterday, I bought some Peanut Butter M&M’s (my favorite candy) at CVS. As an armchair economist, you could probably answer the following questions yourself without even realizing you are using the basic principles of economics.

• Who? Me, obviously. Unless I paid them or provided a service for them, what incentive would someone else have to go buy me candy?
• What? Peanut Butter M&M’s. The M&M’s cost the same as a Crunch bar, but I benefit more from the M&M’s because I enjoy them more.
• When? Around 2:00 PM. Up until that time, the benefit of eating the M&M’s didn’t outweigh the cost walking down to CVS to get them. Thus I didn’t have a high enough demand for them until 2:00.
• Where? CVS. There, the M&M’s cost $.79. At Harris Teeter, they cost $.99. The obvious benefit is a savings of $.20. This is, of course, ignoring the fact that Harris Teeter is about 2 miles from my house whereas CVS is right down the street, thus CVS is even more beneficial.
• Why? Simply put, the benefits of receiving and eating the M&M’s obviously were greater than the cost of acquiring them.
• How? I walked to CVS. I could have driven my truck or ridden a bike, but for me the cost of walking was less than that of driving or pedaling.
• How much? 1 pack. I bought 1 pack instead of 2 because the marginal benefit of the second pack of M&M’s was not greater than its cost.

Assumptions

Included in the basic principles of economics are simple propositions that economists call assumptions. Assumptions allow us to simplify the seemingly complex world we live in and make certain aspects of it easier to understand. Essentially, they simplify situations or issues and make the problem-solving easier and more approachable. For example, if we wanted to approach or understand international trade, we could assume that there are only two countries in the world and that each country produces only two goods. This is usually the example given in introductory economics courses. While quite unrealistic, the assumption simplifies the concept and we can have a better understanding and a tighter focus. Assumptions comprise the framework of economics, and everything and anything related to economics is built upon certain underlying assumptions.

Models

In third grade, I made a model of the solar system by hanging painted styrofoam balls from some clothes hangers. Similarly, economists use models like diagrams and equations which are built with assumptions to illustrate the fundamental principles of economics. Just like my model in third grade simplified the solar system, economic models attempt to simplify reality in order to better understand it.

The applicability of the theories and laws and principles of economics is vast. Most economists use economic reasoning when observing human behavior. Moreover, when the range of that applicability is in question, economists prefer to be overly inclusive, pushing the limits a bit, which definitely makes things more interesting. Think about what you know now about economics. I’ll make an armchair economist out of you yet.

Tyler runs a site about basic principles of economics [http://www.armchaireconomics.com]. He also has a site about finding affordable motor car insurance. His site is called Car Insurance Ireland [http://www.carinsurancebuzz.com/].