Economics and Your Personal Finances

by Gary Foreman

What a high school econ teacher knows could save you money. Read on to find out how knowing some things about economics can help with our personal finances.

“Economics: the science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.” (Dictionary.com)

How we relate to money can make a major difference in our lives. So why are we so uninformed about the study of money called ‘economics’? Wouldn’t it be smart to study how economics could help the average person’s finances?

So we found a high school economics teacher to ask a few questions. Susan ‘Econ’ Elliott has been teaching economics for over a decade and is in the process of writing a book on the subject. Here are some things she’s learned that could help your personal finances.

Q. What’s the most important economic principle that would help the average consumer’s finances?

A. The concept of non-monetary costs associated with finances. Most people associate only monetary costs with their purchases.

Q. What other costs are there?

A. There are a number of other costs:

Search Costs – how long it takes you to find something in Walmart, online, etc.

Transaction Costs – additional costs over and above the cost of the item, like taxes, shipping, waiting in line, load fees on investments, etc.

Sunk Costs – costs that are in the past and cannot be recovered. Items at a dollar store are usually sunk costs because we aren’t willing to return them. If the receipt is lost or it’s over 30 days, it may be a sunk cost. Unfortunately, humans often take sunk costs into consideration when making decisions, and because they are sunk costs, they are irrelevant. For example, you’ve been waiting in as low line for ten minutes. A new line has opened up next to you and people start flooding over. You think to yourself, “I’ve already waited all this time in this line, I shouldn’t jump.” That is taking sunk costs into consideration. You have already waited 10 minutes in that line regardless of the new line.

Opportunity Costs – the cost of the next best alternative. What are you giving up in order to have your choice? Once you spend your time, money, and effort on this choice, you can no longer spend that same time, money, or effort on something else. Was it worth it? There is a commercial out right now with people not spending their orange money, in order to save it for retirement. If you spent it on other things, then you can no longer invest it for your retirement.

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Q. What do most people think they know about economics that’s not true?

A. Most people think economics is about money and graphs. It isn’t. Economics is about decision making and allocating resources to their most efficient use. That is why everyone should understand economics to have better lives through better decision making and resource allocation!

Q. What tool based in economics do marketers use to get us to buy and spend more?

A. Marketers use incentives to get us to buy things. These incentives include sales, low financing costs, buy one get one free, etc. There are two questions I’d like you to think about before taking them up on this incentive: 1) Why is it on sale? (Going bad, a new one coming out soon, it’s being discontinued, etc.) If you’re OK with that, then go ahead. 2) Will this ‘sale’ force you to buy more than you normally would, and therefore cost you more than you are saving? (See How Retailers Trick Shoppers into Spending More.)

Something I see at the grocery store all the time is 2 for $1 or 4 for $10. Do you really need to buy two or four to get that price? Do you really need two or four of the item?

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.