We will first explain some basic economics principles that are interrelated. These principles form the basis for decision making and consideration for a particular choice by individual, businesses and firms. The interrelationship between these concepts as well as the interdependency of individual, businesses and government in an economy are better understood when the effects of their decisions are examined in relation to the economy. The decision making process affect the allocation of the scarce resource. It should be noted that the resources must be well allocated if most benefit is expected from the chosen alternative.
Consequently, finding correct ways to achieve an objective determine whether the choice of such person is rational or irrational. In finding correct ways to achieve an objective, human interactions with business and government plays a roll. So also are forces of demand and supply, preference etc. as a result of sets of social values and objectives shared by individuals in a society.
Overview of Principle of Economics
The
field and discipline of economics is divided into two main areas, leveled to
individuals and the society. The study of individuals, their economic decisions
making, and how those decisions intermingle is called microeconomics.
Microeconomics could also be defined as the study of the decisions of
individuals, households, and businesses in specific markets. In contrast,
macroeconomics is the study of the overall functioning of an economy such as
basic economic growth, unemployment, or inflation, whereas Scarcity in
microeconomics is not the same as poverty. Macroeconomics is concerned more
with the up and-down trends in the larger economy. Both of these disciplines are
based on some key fundamental principles.
Choices
In
our day-to-day life, we are usually faced with one objective or the other that
requires decision making. Every decision involves choices and by extension
having more of one good means having less of another good. Therefore there is
usually a trade-off between the two choices. This is applicable not only to
individuals but also to families, corporations, government and societies. Take
for instance, if Ade has N20 and is stuck between buying an ice-cream or
chocolate candy. He must take a decision whether to buy chocolate candy or go
for the icecream. His decision might be influenced by some other factors. For example
if it is a sunny day and Ade is thirsty, he might prefer ice-cream to chocolate
candy. If he has discovered that taking chocolates stimulate him to a good
sleep, he might go for chocolate because he need a good sleep thereafter or
leave that choice because he must study thereafter. He will thus go for one of
the choices which he believes is the correct one to maximize his satisfaction.
Opportunity Cost
In
making a decision, we implicitly compare the costs and benefits of our choices
over the other one. Opportunity cost is whatever must be given up to obtain
something. Let us refer back to the case of Ade above, assuming he chooses
chocolate candy because he needs it to stimulate him to a deep sleep. The
ice-cream becomes the opportunity cost of buying chocolate candy. An
out-of-pocket expense is the price of the chocolate i.e. N20 which is an
obvious cost. Opportunity cost is an implicit cost and other less obvious costs
given up to have the best alternative. So implicit costs are cost that includes
next best opportunity given up, this must be included in aggregate opportunity
cost.
Rationality
As
far as basic economics is concern, it assumes that people act rationally so as
to gain the most benefit for themselves especially when benefit is compared
with the associated costs. Behaviour, decision, expectation etc. can be
rational or irrational. Foley (2003) defined the word “rational” to mean an act
that is consistent and influential to achieving some well-defined end. He went
further to define the word “irrational” as behaviour that appears to be
intrinsically self-defeating or insane. For instance it is rational to pile up
stones to make a wall, if you want to build a wall, but irrational to pile
stones up in one place simply in order to move them to another place, and then
move them back again.
The
concept of “rationality” also connotes a reasonable orientation toward the real
world, and an ability to explain one’s actions to others in terms that they can
understand. Rational people usually think at the margin by comparing costs and
benefits such that changes in either the benefit or cost may change their
decisions. People respond to incentive for instance changes in prices. Broadly
speaking, people are more likely to buy a particular good if it is cheaper to
other substitutes that are changes in cost determine their decision to buy.
That is if an action becomes more costly, then there is an incentive to swap to
other choices since there are substitutes for all actions.
The objectives of each individual differ so also are the alternatives available to them. In satisfying these objectives, there is the need for efficient allocation of scarce resources. This is paramount in order to satisfy as many wants as possible. Therefore categorizing the choices to see the best that can maximize each objective is supreme in cost analysis of the choice made. The rationale behind a choice may be influenced by social institutions that arise from human behaviours. All these have their effects on economic growth of individual, businesses and government. Economic problems are another tool in resolving the conflict of objectives and choices and it assist in making rational decision. This shall be fully discourse in the next page.
It is
established that economics studies how decisions are made by individual,
businesses and government on wealth creation through production of goods and
services. The decisions on distributions of such goods as well as their
consumption affect our day-to-day activities and the overall economy. In
consequence, careful review of objectives and choices, the opportunity cost of
the best alternative forgone and rational decision are vital economic concept
that are imperative in the study of economics.
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