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A description of why we should use principles of economics in our daily lives

Microeconomics and macroeconomics the study of the larger aggregate economy together make up the two main branches of economics.

Principles of Economics That Relate to Your Daily Life

So how do the principles of microeconomics affect everyday life? Most people have a limited amount of time and money. They cannot buy or do everything they want, so they make calculated decisions on how to use limited resources to maximize personal satisfaction. Similarly, a business also has limited time and money.

3 Economic Principles You Can Apply to Your Life

Microeconomics Principles Microeconomics uses certain principles to explain how individuals and businesses make decisions. One of the basic principles of microeconomics is that individuals make decisions to maximize their satisfaction. In microeconomics, this is called maximizing utility. Another economic principle that comes into play as consumers make decisions is opportunity cost. When an individual makes a decision, she also calculates the cost of forgoing the next best alternative.

For instance, if you use your frequent flier miles to take a trip to the Bahamas, you will no longer be able to redeem the miles for cash. The missed cash is an opportunity cost.

Diminishing marginal utilityanother economic input, describes the general consumer experience that the more you consume of something, the lower the satisfaction you get. For instance, when you eat one burger you may feel very satisfied.

Microeconomics Principles

But if you eat a second burger, you may feel a lesser amount of satisfaction than with the the first burger. Two other important economic principles are supply and demand. Market supply refers to the total amount of a certain good or service available on the market to consumers, while market demand refers to the total demand for the good or service.

The interplay of supply and demand helps determine prices for a product or service, with higher demand and limited supply typically making for higher prices. In a city like New York, there is a limited supply of housing and high demand.

How Microeconomics Affects Everyday Life

To rent an apartment, first you must determine a budget. For this, you will have to take into account your income and how much money you are looking to spend on housing, in such a way as to maximize your utility, or satisfaction. If you allocate too much of your income to rent, you will not have a lot of money left for other expenses. Thus, you will have to decide what is the most amount of money you are willing to part with, what amenities you must have in your apartment, and acceptable neighborhoods.

Based on all the above factors, you set a budget to get the most satisfaction for the least possible rent.

You will not pay more than you have to in order to get what you want. Considering that in this supply-constrained market there are others also interested in renting the apartments that are more in demand, you might find that you will have to increase your budget.

  • We are so accustomed to listening to our professors, parents and bosses;
  • The interplay of supply and demand helps determine prices for a product or service, with higher demand and limited supply typically making for higher prices;
  • There are mathematic ways of calculating the point at which your action has less of an effect;
  • Consumers seek to maximize their satisfaction when they go out and shop for anything from paper towels to apartments, houses, and cars.

That is the opportunity cost of finding the right apartment. Similarly, a landlord will seek to rent an apartment at the highest price possible, since her motivation generally is to get the best return by renting out the apartment. In setting the rent, she would have to take into account the demand for the apartment and the neighborhood.

  1. International trade allows nations to focus on what they do best and then trade for the things that can't produce efficiently. One of the basic principles of microeconomics is that individuals make decisions to maximize their satisfaction.
  2. Another economic principle that comes into play as consumers make decisions is opportunity cost.
  3. The truth is, being aware of this basic principle should help you keep things in check in terms of spending money, buying too many new shoes, over eating, sleep, work etc. Alternative approaches to economics at UIC Our department structures its courses in order to serve students with diverse interests.

The business owner, in this case the landlord, also makes decisions based on supply and demand. Thus, both you and the landlord will make decisions to get the best outcome for yourselves given the constraints you face.

The Bottom Line In a capitalist economy, both consumers and businesses make thousands of big and small decisions each year guided by the principles of microeconomics. Consumers seek to maximize their satisfaction when they go out and shop for anything from paper towels to apartments, houses, and cars.

Businesses set prices and make other decisions based on microeconomics. The prices that consumers will pay depends on the supply of a good, as well as how much others are willing to pay for it.