Posted on March 22nd 2020, Revised on Oct 25th 2020

Economics isn’t just about the economy- it’s universal. It’s funny to think that if an alien race were to get to our level of technology, it’s highly likely they would deduce the same principles of economics. Economics is everywhere, including in the way we think.

After picking up Macro and Microeconomics in preparation for my Advanced Placement Exams, I began implementing the concepts I’ve learned as mental models without knowing it.

When we grow up, we build internal systems called mental models to help us understand the world. These models shape how we reason, rationalize decisions and view opportunities.

When we are young, the mental models we use are defined from the limited experiences of how the world functions. Our puny brain cannot comprehend what happens and uses models to simplify the data points we perceive.

As we grow older, we adapt to the world, begin to adopt newer, more accurate models. If you never studied mental models or questioned the way you thought, this is a great opportunity to do so. Try and understand why you think the way you do, and consider the following models from economics.

These are fundamental concepts in Economics that I use on a daily basis- especially as decision making frameworks.

1. Opportunity Costs

Doing one thing means not being able to do another. We live in a world of trade-offs, and the concept of opportunity cost rules all.

It is easy to think of opportunities in the scope of only the value you gain. For example, say you were considering interning at McDonald’s over the summer. Sure you are earning $15 an hour which is one aspect to consider but to better assess the opportunity, you need to consider the sacrifices you will make for the best alternative option.

Continuing with the example, say you could intern at McDonald’s, work at Google, or volunteer as a soccer coach. By pursuing McDonald’s, you are losing out on the best option, Google, which pays $30 an hour plus gives you good work experience. Despite earning $15 an hour, by pursuing this option, you are losing out on $30+ an hour which is the opportunity cost.