Economics: It’s not Rocket Science!

- Sai Kumar , Economics Association

2017-02-19

Technical

Have you ever wondered why gold, stock prices or even vegetable prices vary continuously? Or why every year there is a huge hustle in March just before the union budget comes into effect in April? Or why Lamborghinis and those branded jeans you love cost so much in India? If the answer is yes, read on! If not, have you at least wondered what 150 of your peers (blokes wearing a certain t-shirt with the caption ‘Economists do it with models’) study in the Economics department? Read on, for economics explains everything from why some countries are richer than others to why you are single (*Ouch).

Economics is a social science (also called a pseudo-science) and as one bloke defined it (read: a famous Economist and influential person):

Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternate uses.

It’s not complicated at all. For example, here’s a Nobel winning paper summarized in one line ‘Countries trade because people want variety’. There. You’ve just learnt Krugman’s new trade theory. It’s that simple, and also not so, at the same time. Apart from a lot of spherical cow (sacred animal of physicists) approximations, to be able to read through papers such as this and some much cooler (think space travel), you’ll need to know a few terms.

So here we go, Economics 101:

First the basics:

Opportunity Cost:

The best alternative we forgo, or give up, when we make a choice or a decision. It’s exactly what the meme says.

It is the cost of the best activity you would do if you weren’t doing what you currently intend to do. It’s like a choice between sleeping in as against attending an 8’O clock class with surprise tests.

Marginalism: The process of analysing the incremental cost/benefit arising from a choice or decision.

Sunk Cost:

Costs that cannot be avoided as they have already be incurred.

For example, your semester fees, because you’ve paid it in advance and it does not matter whether you attend class or not, you cannot do anything about it.

Efficient Market Hypothesis:

A market in which all profit opportunities are eliminated almost instantaneously.

This is one of the spherical cows of economics because it assumes all relevant information is available to all participants and everybody is rational.

In financial economics, the theory states that the market is impossible to beat because all relevant information is already reflected in the price of a stock. Warren Buffet is one of the many investors who do not share this idea. All those years ago (around 1970) Warren Buffet was like

We all know how that turned out.

Ceteris paribus: A device used to analyse the relationship between two variables holding all else constant.

This literally means all else equal. This is one of the tools along with Ockham’s Razor which help to make extremely simplified assumptions. But then,

This is one of the ways to analyse different variable interacting with each other without external noise so that in all, a super position of the different interactions will give us a final equation embodying all factors.