Why every student needs a bit of economicsBy Gary Foreman
Dear New Frugal You,
My parents tell me that I should take some economics courses
in college. I'm a sociology major and don't see how that would help me. Isn't
economics just for business or finance majors? What could I possibly learn that
would have any value? -- Undergrad Sally
Dear Sally,
Hate to disappoint you, but I agree with your parents.
Everyone should have some basic economic knowledge. It's not that we think
you'll become an economist, but the concepts you'll learn from economics will
affect the decisions you'll make. A lack of understanding of economic
principles can lead you to make some very bad choices. In fact, I'd argue that
an economics class could have a major effect on your future happiness!
Take one of the basic concepts of economics: opportunity cost.
It's likely you've never heard of the term, even though you are exposed to it
many times every day.
Let's begin with an expert definition. The Economist website
defines opportunity cost as "the true cost of something is what you give
up to get it. This includes not only the money spent in buying (or doing) the
something, but also the economic benefits that you did without because you
bought (or did) that particular something and thus can no long buy (or do)
something else."
Let's translate that definition into everyday English. In
its simplest form, it means that to get something you have to give up something
else. Pretty simple concept, eh?
For instance, suppose you stop and buy a can of soda on the
way home from work. You give the cashier $1.25 and take the soda. In this case,
$1.25 is the price that you paid for having a soda.
The opportunity cost is what else you could have done with
that $1.25. For instance, you could have gone down the street and ordered
something off of the fast food dollar menu and had change to spare. You could
have put it into an account where you're saving for a big screen TV. Or you
might have put it into your 401(k) account and watched it grow to $4, $8 or
even $16 by the time you retire. You get the idea.
Opportunity cost is what you give up today or in the future
when you make a purchase.
There's another way that opportunity costs work. Suppose
that you live and work in Milwaukee, and you're offered a job in Los Angeles.
If you choose to stay in Milwaukee, the opportunity cost is the job you turned
down and the chance to live in L.A. You'll be giving up warmer weather, but
also a higher cost of living. The point is by choosing one thing, you're
eliminating others.
Or, have you ever considered how much time a purchase costs
you? Suppose that you make $20 an hour and when taxes are taken out, you end up
with $15. Every time you spend $15, your opportunity cost is one hour of work.
That might not seem like much, but it should cause you to think when you're
about to buy a $30,000 car -- that's 2,000 hours or 50 full-time weeks.
There are other economic theories that the average consumer
should learn. Most of us are aware of the law of supply and demand. But have
you ever thought about it when you want to ask for a raise? If the demand for
your services is high, you'll stand a better chance of getting more money. On
the other hand, if there are unemployed people lining up for a job like yours,
then now might not be the time to have that talk with your boss.
In economics class, you'll also learn about the time value
of money. It's another simple theory that crosses your path every day.
The Economist would say that having a dollar today is worth
more than having a dollar tomorrow. Doubt that he's right? Then ask yourself
why you pay interest on your student loans. The answer is that the dollar you
borrow today is worth more than the dollar you'll repay years from now.
Or, if you flip the concept, you'd rather have someone give
you a dollar today rather than give it to you a year from now. If you had the
dollar today, you could put it in a savings account and earn a little (OK,
right now a very little) interest. Or you could put it toward that soda we
talked about earlier.
So Sally, I'd advise you to take that economics class, even
if it's not part of your major. In fact, it's especially smart to take it if
it's not part of your major. One thing you'll learn is that you invest today to
reap benefits tomorrow. That's exactly why you should take the course: to learn
something today that will pay dividends for the rest of your life.
See related: Understanding opportunity costs
For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week.
Send your question to The New Frugal You.
Published: October 13, 2011
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