Thick books full of equations deter most people from learning economics. The suspicion that there might be something wrong with the whole science is not unfounded. Otherwise, if economists are so knowledgeable, how do you explain that many of them are not wealthy?
course on economics begins with the law of supply and demand, which is
considered the baseline of the science. This principle teaches that
consumers buy fewer units when prices are high, but that on the other
hand, when prices are low, for the same amount of money, you can get
Since people have been acting in this way since the
beginning of time, one might wonder if such wisdom justifies the cost of
taking an economics course. My answer is rotundly positive. No matter
how simple principles look, their applications demand subtlety and can
lead to many blind alleys.
When it comes to applied economics,
the most important paradigm is not mathematical. Understanding it can
help you make better decisions and, above all, avoid many traps in your
private and business life. If you choose to study only one thing about
economics, let me suggest that you learn to tell the difference between
consumption and investment, in particular:
1. Investments are not
characterized by a high acquisition cost. A large house on the beach
that you buy to spend your summer holidays every year can be expensive,
but is not an investment, since it does not produce you any income. In
comparison, a small low-cost apartment that you rent out to tenants does
constitute an asset.
2. Investments are not defined by their
long durability. A refrigerator that you purchase for your kitchen may
last 10 years, but does not generate you any income. Such acquisition is
not an investment. In contrast, a set of liquor glasses that may last 3
years is an investment if you buy them for use in your restaurant.
lesson is that the aspect that creates the distinction between
consumption and investment is psychological. Classifying buildings
automatically as investments without considering their purpose may lead
to wrong decisions and expensive errors.
The fundamental economic
difference between assets and expenditures lies in the use we give
to each item, not in the accounting rules regarding depreciation and tax
deductions. A laptop computer to play video games is a consumption item,
unless you get paid for playing those, for instance, because you write
reviews for a video-games magazine.
The consequences of this
principle are wide-ranging and encompass all fields of our lives. Being
conscious of the difference can help you, for instance, to buy your
clothes more efficiently, to discard worthless investment proposals
quickly, and to reduce the cost of starting your own company.
what truly constitutes an investment results in the waste of enormous
sums of money every year. Do not fall into the trap of wrong assumptions. Not every
big-ticket item is an asset and not all inexpensive purchases are
consumer goods. When you make decisions, you will be much better off if
you weigh each element according to its veritable nature.
For more information about rational living and personal development, I refer you to my book about how to be rational "The 10 Principles of Rational Living"
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