The Answer to All Economics Questions3 min read

We all had a teacher who we will remember for life, be it for good or bad reasons.

For me, it is my economics teacher in JC1. He was a unique teacher who stuck to his own set of methods and style of instruction. Unfortunately, it was not a style favoured by some of his students and he was often misunderstood to be a bad teacher. In my opinion, he was simply different; he would used to come to class and rattle on about one of his stories about his daughter in UK, while weaving in explanations of economic concepts and his own opinions on current affairs; he never went through a single school tutorial worksheet during our tutorial sessions; he loved MCQs and would spend hours going through the questions because he believed that MCQs can bring about a strong fundamental understanding of the subject; he would send us emails with articles from The Economist and The Straits Times, often using these articles to illustrate key economic ideas.

I would never forget the first economics lesson he had with us. It was the first ever economics lesson for my class. He was fifteen minutes late and we had to use the computer lab as a makeshift classroom because of some mix-up. He came in, swiftly introduced himself and posed us a question,

What is the answer to all economics questions?

We were stunned and puzzled. In our minds we were thinking, “wow, if there really was such an answer then wouldn’t economics be really easy to study for?” We were hopeful yet skeptical.

Then he wrote on the board:

It Depends.

The class cackled at the rather lame and obvious answer. “Depends on what?” was the first retort that many of us came up with. Yet in retrospect, it is amazing how much sense the simple two-word answer makes. Economists seldom agree with one another, even on the simplest of issues. It is no wonder that we spend two years in JC learning about the different economic concepts and coming up with thesis and anti-thesis arguments and sounding all schizophrenic in our essays.

The best students are the ones who can confidently articulate the most important ideas after answering the question, “what does it depend on?”

Back to the scene of the computer lab… After the murmur died down, he asked us if we could say in a single sentence, what economics is about. Another stunner! Sure enough, no one was even brave enough to venture a response.

Then he scribbled on the board again:

People respond to incentives.

Essentially, these four words succinctly describes what most of economics (especially microeconomics) is about. Economists basically study how economic agents (like you and I) respond to different triggers. By looking at how individuals respond to certain signals and by observing how they make choices, many behavioural trends and preferences can thus be derived. The sum of these individual actions and decisions will then have an impact on the outcomes in society with regard to concepts such as efficiency and equity. Whether or not society’s welfare is maximised or not depends on putting the right set of incentives in place to motivate people to strive towards that outcome. Perhaps the free market can do that best, or might a command economy controlled by the government be better? How do we know?

Yes, you have guessed it – It Depends.

Keep an open mind

At the end of the day, the study of economics requires an open mind. Be adventurous and brave enough to come up with arguments to challenge what is written in the notes or what are said by the teacher; form your own stand on issues and try your best to qualify that stand; I welcome you to debate with me on economic ideas on this blog.

Remember the answer to all economics questions.

Thank you, Mr. Dave Sowden for teaching that wonderful lesson.

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5 Comments

  1. Can i ask a question? Why would monopoliistically competitive firms rarely engage in a price war? and since it is possible for them to engage in one,why does the kinked demand curve theory not apply to them?

    Reply

    1. MC firms are assumed to be independent. That is, they make decisions without taking into consideration what its rivals do. Also, decisions of other firms do not affect them. One firm changing its price will thus have no effect on another firm’s demand.

      Whether or not this assumption is true in reality is debatable. MC firms in close geographical proximity could very well violate this assumption and be more interdependent. This could then affect their pricing and non-price decisions accordingly.

      Reply

    2. Hi in reality we do see MC firms engage in price wars, but in theory this is unlikely for two reasons.

      1. MC firms are assumed to operate independently in their pricing decisions as if there are monopolies. This assumption stems from the fact that MC firms are small and selling differentiated products, hence it is unlikely that one firm’s actions can impact another’s demand. Thus there is no willingness/incentive for MC firms to engage in a price war.

      However in reality this assumption may breakdown when MC firms are located within close geographical proximity of one another. Consumers may see these firms’ products as close substitutes and they may have a higher degree of interdependence than what’s assumed in theory.

      2. MC firms can only make normal profits in the LR due to low barriers to entry in the industry. This suggests that their financial ability to engage and survive a price war will be limited as compared to oligopolies that could make supernormal profits in the LR. Thus there is less ability for MC firms to engage in a price war.

      Hope this answers your question.

      Reply

    3. Hi in reality we do see MC firms engage in price wars, but in theory this is unlikely for two reasons.

      1. MC firms are assumed to operate independently in their pricing decisions as if there are monopolies. This assumption stems from the fact that MC firms are small and selling differentiated products, hence it is unlikely that one firm’s actions can impact another’s demand. Thus there is no willingness/incentive for MC firms to engage in a price war.

      However in reality this assumption may breakdown when MC firms are located within close geographical proximity of one another. Consumers may see these firms’ products as close substitutes and they may have a higher degree of interdependence than what’s assumed in theory.

      2. MC firms can only make normal profits in the LR due to low barriers to entry in the industry. This suggests that their financial ability to engage and survive a price war will be limited as compared to oligopolies that could make supernormal profits in the LR. Thus there is less ability for MC firms to engage in a price war.

      Hope this answers your question.

      Reply

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