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Personal Finance & Economics

Once, in a fit of rage over small town living, my friend Elisabeth exclaimed, “Why doesn’t this town just use the economy to bring in a Target?!”  Hopefully after reading this article, you will find that statement as hilarious as I did. 

Most people that I know who have ever taken a course in economics slept right through it.  I will tell you right now that I love the study of economics; I love the common sense, I love the relevant graphs, I love love love it.  You will feel the same way once you realize how applicable of a science it is (maybe not exactly the same way, but you’ll appreciate it), particularly to your personal finances. 

Let’s review some of those key concepts that some of you may have snoozed through.

1.  The economy is not one thing, it is a series of activities: production, distribution & consumption.  It can’t bring you a pillow, a glass of water, or anything.  What a CRAZY idea.

2.  Law of Supply and Demand:

Demand is the quantity of product that the population is willing to purchase at a certain price.  As the price goes up, people are willing to buy less of the product.  That makes sense; you have a budget, the more expensive something is, the less likely you are to buy it.

Supply is the quantity of product that producers are willing to make if they are going to sell it for a certain price.  As the price goes up, producers are willing to make more of the product because it means more money.

Supply and demand must meet in the middle for everyone to be happy.  If Apple made 1,000,0000 iPhones and sold them for $1,000 each, they would be stuck with a bunch of iPhones because people don’t want to pay that much.  On the other hand, if Apple made 1,000 iPhones and sold them for $20 each, they would sell out and there would be a bunch of mad customer’s who wanted iPhones but couldn’t get them.

Elementary, right?

3.  Opportunity Cost – What you give up in order to do something else.  If you go to the mall, you don’t get to go to the beach.  If you buy new clothes, you can’t spend the money on the new computer.  You make these decisions everyday, whether you truly consider them or not. 

Wow, you made it all the way down here and you’re still awake?  Pat yourself on the back.  Now, let’s talk about what all of this has to do with you. 

You are trying to keep your personal finances on track.  You made a budget.  You are setting goals for retirement, savings, your kids’ college funds.  You are on your way to being the Big Kahuna of personal finance.  The next step is understanding the Market Forces (these are not from Star Wars) and using them to your advantage. 

  • In the supply-demand equation, you are the demand.  You have a threshold for the amount you are willing to pay for ANYTHING.  But you are not alone out there.  Those suppliers are out to sell to you (which seems a bit paranoid, but it’s true) and will do their best to influence you.  When you come to terms with this idea, you can shop smarter, stay on budget, and achieve your dream of Big Kahunaness.  Next time you go to the store, take a look around and consider how much money went into advertising and influencing.
  • Consider what you’re giving up when you make a purchase (remember the opportunity cost from a few seconds ago?).  Don’t get me wrong, not all purchases are bad, you can get some pretty neato stuff.  When you buy something, the cost isn’t merely the price tag, it includes what you now don’t get to do with that money.
  • Stop overanalzying what you just read.  I don’t want you second guessing every purchase, that would take too much time; time that could be spent doing something else…

Take some time to tell the group about your favorite economist OR your favorite food. 




Article publié pour la première fois le 30/06/2010