Substitution Effect: Why Inflation Become So Humane


Nobody like inflation. Yes, people assume that a country fails when inflation getting higher. But behind it, nature of human be a reason why price goes high every year.

When you study about economics, specially micro economics, there is a famous theorem. Yes, “diminishing marginal utility”. For everyone who doesn’t know what this theorem means, this theory said that we receive more goods, more and more, the utility of those goods will decrease. Wonder you eat pizzas, when you get satisfaction from slices you eat, you won’t eat anymore, will you?

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It turns out, money can be act like goods. When you get more money, you bring too much money in your wallet, you have tendency to expense it. Believe or not, you will expense your money more if you bring 100 USD than you only have 10 USD. This is called substitution effect. People will change their money in to goods and services they need even they want.

When you want to expense your money it will make demands of some certain goods will increase. If amount of good inventories less than demands, producers will increase price level for produce more goods. In this situation, inflation occurs.

Actually, we can not blame our selves on our nature, we love expense more when we get more money. This why we study about economics. We learn about human nature and how to manage it to get benefits for us.

Now you understand how human act on money, so try to do not bring too much cash in your wallet. Let it save in your bank. When you go to mall, bring only in small number and debit/credit card. Second, when you get more payment try to invest it. Saving in bank is one of investment. We get more benefits and profits for future if we begins to invest what we have now.

People and government can’t make inflation level become 0% but it can be slow down so we get no bad impact of this.

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