“Economics is the science of making choices”. The reason of people have to make choices is because the resources such as goods and services are limited. People usually tend to make choices to maximize their benefits. However, every choice involves a cost (Dobson & Palfreman, 1999). From a neoclassical economics perspective, economics can be divided into two branches: microeconomics and macroeconomics (Gans, King, Stonecash & Mankiw, 2012). This essay is going to discuss what is economics and how economics affect people’s daily life. First of all, the origin and the development of economics will be discussed. Secondly, this essay will touch on few basic economics’s theories and will focus on the opportunity cost. Furthermore, an example will illustrate how to use economics’s theories into practice.
Generally, the best way to comprehensive understand one thing is tracing back to its origin. Callahan (2004), considers that before economics become a distinct science, people realize there is “a predictable regularity” which interacts with people in society. This regulation was called “spontaneous order” in the area of western sciences. The order could be generate by God or the rulers. However, after the Industrial Revolution broke across western European society, the rulers became increasingly ineffective. Surprisingly, the society did not fall into disorder. It means the society has its own regulation to impel people to produce goods and services to satisfy the demand. This process do not have to be under the guide from God or the rulers. Adam smith calls this regulation as “invisible hand”. “Adam Smith is often seen as the founder of modern economics” (p. 10). He believed “individual interacting through the marketplace, guided only by their self-interest, promote general economic wellbeing” (Gans et al, 2012). In Adam’s view, government is useless. However Gans et al., (2012) argue that the market-based economy has its own weakness. When market fail to allocate resource efficiently, government will be needed to adjust the allocation of resources. So, the development of economics is accompanied by the development of human society.
Begg (2009) claims that the resources such as products and services are limited. It is impossible to use limited resources of society to meet every individual’s demand. Because of this, people need “toolkits” to manage and allocate the scarce resources. This “toolkits” is economics. In Callahan’s book, he mentioned Kirzner (1966) said: “a series of formulations of the economic point of view that are astounding in their variety.” However, standing on the angle of neoclassical economics, the definition of economics is: “the study of how society manages its scarce resources.”(Gans et al, 2012). Due to the resources such as time, goods and services are scarce. The “scarce” cause people’s dissatisfaction. Callahan (2004) claims that the driving force of human action is dissatisfaction. The emotion of dissatisfaction lead people to make choices: weather to do some action to change the situation or to maintain the status quo. That means in the circumstances of scarce resources people have to make choices. As Gans et al., (2012) said: “People make decisions by comparing costs and benefits at the margin.” Generally, rational people make choices to benefit themselves. Because “ people respond to incentives.” Nevertheless, unfortunately, there is no free lunch. When people expect to receive the benefit from the decision they have made, the cost will be paid at the same time. “The cost of something is what you give up to get it.” (Gans et al, 2012). The cost is not only refers to money but also include time or other opportunities which may generate benefits. Economics offer people a new angle of view when people facing decision making. People should take opportunity cost into account as well. For example, married women usually would experience a