Economics Isn’t Really About Money — It’s About Choices
Most people think economics is mainly about money. Money is certainly part of it. So are inflation, taxation, interest rates, government borrowing and stock markets. But these are not really what economics is about.
Imagine that you have just finished your A-Levels. You could go to university, start an apprenticeship or begin working straight away. Each option might be sensible. Each could lead to a successful career. But you cannot do all three at the same time. You have to choose.
That is where economics begins.
At its heart, economics is the study of how people, businesses and governments make choices when they cannot have everything they want. Once you understand that simple idea, much of the rest of the subject starts to make sense.
We All Make Economic Decisions
Every day, people make decisions that are economic, even if they do not think of them in those terms. Should you buy a coffee on the way to college or save the money? Should you spend the evening revising, working a part-time job or seeing friends? Should you save for a holiday or buy a new phone?
Households make similar decisions on a larger scale. They decide how much of their income to spend, how much to save and whether to borrow. They may have to choose between moving house, replacing the car, paying for a holiday or building up savings for the future.
Work involves choices too. People decide what type of job to do, how many hours to work and whether further study or training is worthwhile. One person may prefer a higher salary, while another places more value on flexible hours, job satisfaction or time with their family.
Businesses also face choices, often involving much larger sums of money. They have to decide what goods or services to produce, what prices to charge, how many people to employ and whether to invest in new equipment, premises or technology.
During my career in market research, I have seen businesses consider whether to launch new products, change their prices, redesign packaging or stop selling products altogether. These decisions are rarely straightforward. Consumers may say that they like a new idea, but that does not necessarily mean they will buy it. A product may appeal to customers but be too expensive to produce. A business may have several promising ideas but enough money and management time to pursue only one of them.
Economics helps us understand what is happening in these situations. The business is comparing possible benefits, costs, risks and alternatives. In other words, it is making choices while facing limits.
Governments face difficult decisions as well. They must decide how much to spend on healthcare, education, defence, pensions, transport and many other areas. They also have to decide what taxes to raise and how much to borrow when spending exceeds tax revenue.
None of these choices is cost-free. More spending on one area may leave less available for another. Higher taxes may reduce the amount households and businesses have available to spend or invest. More borrowing creates future interest costs and financial commitments.
Economics does not tell governments that there is one obviously correct answer. It helps us examine the consequences of the available choices.
Why Are Choices Necessary?
If people, businesses and governments could have everything they wanted, economics would hardly exist. Choices are necessary because the resources available to us are limited.
Individuals have limited time and income. Businesses have limited staff, machinery, buildings and finance. Governments have limited resources available to provide public services. Even very wealthy people and highly successful businesses face limits, although those limits may be much less restrictive than they are for others.
Economists describe resources as scarce. The word can be slightly misleading because it does not necessarily mean rare. It means that a resource is finite or limited compared with the different uses people have for it.
Time is a good example. Everyone has only twenty-four hours in a day. That time could be used for work, study, leisure, exercise, sleep or time with friends and family. Using more time for one activity leaves less available for another.
The same is true of money. A household with £100 available cannot spend the same £100 twice. A business that uses its investment budget to open a new shop cannot use the same money to develop a different product. A government that directs more resources towards one public service may have fewer resources available elsewhere.
Economics begins in the gap between what people would like and what can actually be done.
Every Choice Involves a Trade-Off
Because resources are limited, choices involve trade-offs. Gaining one thing often means giving up something else.
Suppose a student spends Saturday working and earns £80. It might seem that working has brought a clear benefit. But the decision also has a cost. The student has given up whatever else they might have done with the day, such as revising, playing sport, resting or spending time with friends.
Economists call the value of the next best alternative forgone the opportunity cost of a decision.
Suppose someone spends £20 on a book. The opportunity cost is not simply the £20. It is whatever they would otherwise have done with that money. They might have gone to the cinema, bought a meal or added the money to their savings. The opportunity cost is the best of those alternatives that they gave up.
Opportunity cost does not always involve money. A student who spends an evening revising gives up the opportunity to do something else. A business that uses a building as a warehouse cannot use the same building as a shop or office. A government that commits land and workers to building a new road cannot use those exact resources for another project at the same time.
This idea is important because the real cost of a decision is not always visible on a receipt. Sometimes the most important cost is the opportunity that has been lost.
Opportunity cost is one of the central ideas in economics, so it deserves a separate article of its own. For now, the key point is simple: choosing one option usually means giving up another.
Why Do People Make Different Choices?
People often face similar choices but make very different decisions. One person may choose to work longer hours, while another values leisure more highly. One student may decide that university is worth the cost and time involved, while another prefers to begin earning immediately.
These differences partly reflect preferences. People do not all value the same things in the same way. They also face different circumstances, incomes, responsibilities and expectations about the future.
Economists are interested in incentives because incentives can alter the costs or benefits associated with a decision.
Higher wages may encourage someone to work more hours. Lower prices may encourage consumers to buy more of a product. A bonus may encourage employees to reach a sales target. A subsidy may encourage businesses to invest in renewable energy, while a tax on cigarettes may discourage consumption by making smoking more expensive.
Incentives are not always financial. Flexible working, job security, promotion opportunities, recognition and enjoyment of the work may all influence behaviour.
Nor do incentives affect everyone in the same way. A small price increase may persuade one consumer to switch products while making almost no difference to another. A pay rise may encourage one person to work more, while another may decide they can now afford to work fewer hours.
Economists therefore use incentives to help explain behaviour, but they do not assume that every person will respond identically.
How Do Millions of Choices Fit Together?
So far, we have looked mainly at individual decisions. The bigger question is what happens when millions of households, workers, businesses, banks and governments make millions of separate choices every day.
No single person decides how many coffees Britain should sell tomorrow. Nobody sits in an office working out exactly how many bicycles should be manufactured next year or how many restaurants should open in each town.
Yet coffees are available each morning. Businesses produce bicycles. Restaurants open and close. Workers train for different jobs. Shops change what they sell.
These outcomes emerge from the interaction of many separate decisions.
Consumers influence businesses through what they buy and what they refuse to buy. Businesses respond to sales, costs and expected profits. Workers respond to pay, working conditions and career prospects. Governments shape decisions through taxation, spending, regulation and public services.
Prices play an important part in coordinating many of these choices. If demand for a product increases, its price may rise, encouraging businesses to supply more. If demand falls, firms may cut production, reduce prices or stop selling the product altogether.
We will look at this process much more closely when we study supply and demand. The important point here is that what we call “the economy” is not a single thing making decisions. It is the result of countless decisions interacting with one another.
How Millions of Decisions Become “the Economy”
People often say that “the market decided” or that “the economy wanted” a particular outcome. These phrases are convenient, but they can also be misleading.
A market is not a person. It does not have opinions or intentions. What we call a market outcome is the combined result of decisions made by consumers, businesses, workers, investors, banks and governments.
The same is true of “the economy”. It is not a separate thing making choices. It is a way of describing the enormous number of decisions being made and interacting every day.
Economics helps us look beneath those broad labels and understand the choices, incentives and constraints that produced the outcomes we observe.
What Economics Is Really About
Economics covers an enormous range of topics. It examines prices, wages, employment, business behaviour, taxation, government spending, inflation, economic growth, trade and development.
But these are connected by one central idea.
People have more wants than they have resources available to satisfy them. Because resources are limited, choices have to be made. Those choices involve trade-offs and opportunity costs. They are influenced by incentives. When millions of decisions interact, they shape the economy in which we all live.
Economics is therefore much more than the study of money.
It is the study of choice.
Where Next?
The next question is what happens when the resources available to us are limited in relation to everything we would like to do. Economists describe this problem as scarcity.
Scarcity explains why choices are necessary, why opportunity costs exist and why no individual, business or government can do everything it might like to do.
Understanding scarcity is therefore the natural next step in understanding Economics.
Further Reading
If you're thinking about studying A-Level Economics, you might also find these guides helpful:
What Will You Learn in A-Level Economics? – An overview of the course, the topics you'll study and the skills you'll develop.
Do You Need Maths for A-Level Economics? – How much maths is involved, what calculations you'll need and why the maths is usually less daunting than many students expect.
Is A-Level Economics Difficult? – What students typically find challenging and how to overcome those difficulties.
Why Study A-Level Economics? – How Economics helps you understand the world and the opportunities it can open up.
If you're ready to begin learning the subject itself, the natural next step is Scarcity: The Fundamental Economic Problem.