Thinking like an economist is one of the major contributors to the creation of personal wealth. It is easy to do if you can ignore the myriad of marketing campaigns all around you.
Building wealth means thinking like an economist (ie., on the thinking on the margins). Simply stated, thinking on the margins is thinking of the marginal benefits gained for each additional unit of currency required. That is, how do the tradeoffs compare and which gives me the best "bang for my buck?" I thought of a simple way to illustrate this today.
I had a choice to either purchase a single bottle of Listerine for $6.59 or a twin pack of Up&Up brand mouthwash for $5.59. I want to save money, but I also want a good product. How do I decide which is the better buy? Isn't one bottle of Listerine obviously better than two bottles of some store brand?
In business, there is a concept known as product convergence, which I previously wrote about. What this means is that similar products, over time, become nearly indistinguishable. In the case of Listerine vs. Up & Up, there are no distinguishable characteristics so far as I can tell. Even the posted ingredients are identical.
It is the job of a company’s marketing department to create a value proposition that will persuade your decision calculus to buy their product. The fact that there is still Listerine being sold at the posted price shows how irrational consumer decision making processes can be, but it’s the fact that it’s still available at any price that drives both quality improvements AND convergence of alternative products as a direct result of consumer demand (ie., competition).
Of course my example of Johnson & Johnson's Listerine vs. Target's Up & Up brand is about as simple of a real world example I could use to illustrate this concept, but it can be applied broadly to every economic decision that you make. This analysis, however, is purely quantitative and it is important to know when you should also evaluate things on qualitative factors.
How does thinking like an economist create wealth, though? That actually depends on your concept of wealth, but it will work out for you in any case. If your definition of wealth is the acquisition of physical assets, then thinking on the margins will allow you to trade more dollars for more physical assets. If your definition of wealth is the value of your financial assets, then thinking on the margins will allow you to save and invest more.
If you want to be really wealthy, though, then you will accumulate both physical and financial assets.
Navy veteran, MBA (University of La Verne), federal VA employee, and three-term American Legion Post Commander. Writing about business, psychology, strategy, and privacy since 2020.
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