Needs and Wants

What’s the Best Way to Decide When I Have to Make Choices?

Economic reasoning has much in common with the Rolling Stones’ line, "You can't always get what you want." Financial decisions—should I buy a car or save the money for college?—involve weighing costs and benefits, balancing needs and wants. It’s important to recognize the difference between the two.

No one makes financial decisions in a vacuum. We act in response to positive and negative incentives. Will a purchase solve a problem or make life better? Will not making that purchase lead to greater savings and a bigger long-term payoff?

Each choice we make carries with it an opportunity cost: knowing that we gave up a second-best alternative when we made the choice.

The choices we have before us and the opportunity costs we traded away are built on a long series of choices that we made ourselves or that were already made by other people, communities, and governments. And the choices we make going forward will affect the economy to some degree. If we can change how we think about our choices, to be more intentional through economic reasoning, we can have a more positive influence on our future and the economy in general.

Needs and Wants

Imagine that a genie magically appears from a bottle and grants you a lifetime supply of one—and one only—physical item. What will you choose?

At first, you might quickly choose something you really want—perhaps the newest electronic gadget, the fanciest sports car, your favorite snack, or the latest fashion. But, if you take some time to use economic reasoning, you might make a different choice that helps you better satisfy your needs over your lifetime. How can you make better choices? Learn more about the difference between needs and wants and the ways that you can make the most of your time, talent, and treasure.

In nature, there are no modern conveniences: no phones, medicines, grocery stores, retail shops, or gas stations. To survive each day, individuals must meet their physical needs. They must find the water, food, clothing, and shelter that keep them alive. These needs must be met every day, over and over, throughout a lifetime. Everything else is, as the expression goes, gravy.

Most people have wants beyond the basics they need to survive. For example, many people feel they want a smartphone. You can’t get nourishment or shelter from a phone. It does make many things easier, but it’s only a tool. A smartphone is, most often, a want, not a need.

Wants, like furniture, fast food, and travel, are not required for daily survival, but they make life better, more comfortable, and more convenient. The list of things we want is endless.

Identifying Needs vs. Wants

So, how can you tell the difference between a need and a want? To answer that question, you must think about what is required to live and separate it from your preferences.

Most people want food beyond what they need to stay alive. We want variety, and we have favorite foods and restaurants. These are wants, over and above the need of food.

Imagine you’re stranded on a remote island with no communication with the outside world. In this situation, it probably wouldn’t take you long to figure out what you really, truly need and what you want but can live without.

Needs and Wants in Good Decision Making

Wants and needs are not the same for everyone and can change over time. Wants reflect our personal tastes and are often influenced by our culture. They can be changed by others’ opinions, marketing, and our experiences.

Think about your own wants for wearing certain clothes, playing games, or even owning the latest smart device. Are your wants the same as those of the person sitting across from you at lunch or in your home? Of course not. These wants are personal, so they change from person to person.

Remember, life is full of choices. Practice recognizing the difference between your physical needs and your wants so you can make good decisions about how to allocate your resources (time, talent, and treasure). Doing so will increase the likelihood that decisions you make today will help you live securely and comfortably in the future.

We’ve been talking about choices you can make about how to use your resources, but is the choice always yours to make? A big question in economics is who gets to decide how resources are used and for what they are used. Do you always get to decide how to use your time, talent, and treasure, or does your family, a business, or a government make these decisions sometimes?

Opportunity Cost

Can you think of a time when you made a choice quickly and later wished you had thought it through a little more? For example, imagine that a friend asked you to skip class and go to a movie. You really wanted to see the movie, so you decided to go. You didn’t think about what you might miss in class. It turns out that the teacher gave a surprise quiz and now your grade is suffering.

When making a choice, weigh the costs and benefits of each option and pursue the option that offers the most benefit at the least cost.

Behind each choice is at least one alternative choice that you could make. The value of that second-best option is what economists call opportunity cost. If you choose to go to the movies instead of going to class, the opportunity cost is the missed class. Recognizing what you’re giving up is fundamental to making sound decisions. In economics, everyone has a choice—even if it is to say “no” and let an opportunity pass.

Incentives

Some human choices and behaviors are predictable. When one person or group wants to influence another person or group, they offer incentives. An incentive is a reward that influences an individual to make a specific choice. Negative incentives, or disincentives, are penalties for certain choices.

Parents use incentives and disincentives to motivate their children to make safe choices instead of unsafe choices. For example, parents may take away driving privileges if they observe their teen driving recklessly. The penalty is designed to encourage a sound choice when the child gets to drive again. Friends, too, use incentives to motivate each other. For example, “You can go first if you come over and play a game.”

Similarly, governments offer incentives. Some come in the form of laws. Consider a speed limit. If a driver goes over the speed limit and gets caught, she might get a ticket, have to pay a fine, and get a penalty on her driving record. These consequences are disincentives. They are put in place so people are not likely to speed: you and others are relatively safer when people obey the speed limit.

Have you ever felt you don’t have enough time to do two things you want to do? Maybe you want to hang out with your friends, but you also have a big project that you need to finish for school. How do you decide what to do? You consider spending less time on the project, not doing the project at all, spending less time hanging out, or not hanging out at all. You consider the pros and cons of different options before making a decision. If this process sounds familiar, then you have used economic reasoning.

Since people must give up something important to gain something more important, they should choose carefully. How? Think about the benefits, or gains, as well as the costs, or sacrifices, in making choices. Economic reasoning tells us to maximize the benefits and minimize the costs of our choices.

Guess what? You already know more about economics than you did when you started reading this passage. In the past, some people have called economics a dismal science or a big mystery that only experts can understand, but you’ve just seen that economic reasoning involves using common sense. It is a powerful way of thinking that can potentially lead to decisions that result in more positive than negative outcomes.