Some Basic Fundamental Principles of Economics: Overview


Fundamental Principles of Economics

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.


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.


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.


Also read on: << what is Economics? >>


Post a Comment