How can you become a master of economics?

The best way to learn about economics is to work at a pizza parlor. Don’t believe me? Allow me to explain.

You wake up early in the morning to go to work. The first customer walks in, declares that he’s hungry, and buys a slice. When he’s done, he buys another… and another! After three slices, though, he’s through. The utility - the enjoyment - he received from the third slice of pizza is far less than that of the first slice, and the law of diminishing utility can accurately predict that the fourth slice of pizza is certainly not worth his money. From across the room, you spot a potential customer looking at the menu, finally deciding that $10 for a pie of pizza is just too much. The customer at the counter, though? He’s famished. He’d pay $15. You don’t know exactly what each customer is willing to pay, but you’ll try to price the pizza in order to maximize profits, while taking into account the public’s general demand for pizza. A couple of days later, you realize that the price is too high, as you have too few customers. You lower the price, and voila! More people come. Eventually, you settle at a price which ensures that you’re making as much as you can, and that price is now in equilibrium. The owner of the neighboring pizza parlor, meanwhile, is wondering why nobody seems to be coming ’round anymore. He stops by at your place, and notices that your pizzas sell for $8, while his go for $9. Reluctantly, he lowers his price and takes the loss. Ah, well - that’s competition for you. A couple of days later, he knocks at your door and asks to speak with you privately. This competition isn’t good for profits, says he. What if we both raise our prices? The customers won’t walk far in order to buy a pizza elsewhere! You think about it for a moment, then decline. While this price fixing can certainly help you out in the short term, in the long term customers will plan to circumvent both of your stores, so this oligopoly of two stores which own all of the pizzas in the area won’t last long. Are you sure? He asks. I’m sure you’ve heard of Jessica, who bought out every single pizza parlor around her area and now enjoys monopoly status. She’s making a killing! Not only is she enjoying economies of scale, which means that’s she’s able to buy pizza supplies in bulk and enjoy lower variable costs, she’s also managed to replace many workers with an automated line, making her labor far more efficient! She’s able to supply far more pizza at a lower price! Maybe we can cut some kind of deal which would work to our benefit. Maybe we could expand and build something bigger together. True, you mull. Interest rates are particularly low, so it wouldn’t be so bad to take out a loan and invest in the business. The way you see it, the internal rate of return - how much you stand to gain by choosing to expand the business - is far better than just leaving your money in a bank. Let’s do it, you say. The government, meanwhile, is quite happy with your decision - they want people to expand their businesses, that’s their monetary policy. They changed the interest rates using all sorts of macroeconomic tools, and are now hoping that their decision is the correct one. After a good day’s work, you’re about to close up shop. But wait! There seems to be a crowd headed your way, encouraged by the local festival. You know that your pizza can complement the festival quite nicely and would stand to make a decent amount of money by keeping open for another hour, but you have promised your wife that you’d spend some quality time with her and the kids. You smile, and lock the store, accepting the opportunity cost - in this case, income forgone - that you’ve paid in order to make time for what you value more. Besides, your demand for family time is inelastic, even a higher price won’t make it change much - after all, if you don’t do as your wife says, you’ll be sleeping on the sofa tonight. “Wait a minute.”, you’re probably thinking. “What if I don’t work in a pizza parlor, like you?” Ah, but I’ve never worked in a pizza parlor. I just happened to visit one an hour ago, and that’s why I chose that particular example. Economics, though? It’s everywhere. And while the textbooks that you will (I hope) eventually be reading will explain in great detail the fact remain, you can learn economics simply by opening your eyes to the world around you. Best of luck, and enjoy!