Economics

Economics

Ceteris paribus – prevalent stated assumption, from Latin – all other things being equal

Aside from being the social science grappling with the dilemma of satisfying an unlimited number of wants given a finite amount of resources, economics sheds light on such topics as choice and opportunity cost. Indeed, given that resources are limited, individuals must often make choices.

The decision making process often centers on utility theory or how many utils, or satisfaction units, one gains from outcome A vs. B. Utilitarianism is an economic and political ideology, hedonistic in nature and aiming to achieve the greatest amount of good for the greatest number of people (popularized by John Stuart Mill, who wrote On Liberty). Precisely, the event, outcome or good one gives up when making a choice is called 'opportunity cost'. After all, every action "has a tendency to produce some definite result if nothing occurs to hinder it” (Marshall, 1890).

Furthermore, according to Matziorinis (2008), cost may be overt and covert. Overt cost would refer to the money paid in exchange of a good or service. Conversely, covert cost represents satisfaction forgone from alternative goods and/or services. Thus, the covert cost corresponds to the opportunity cost.

Making a decision is often stressful, even worse could be the potential negative consequences of taking the wrong path. Further, the author outlines conditions under which the right choice is most likely made: one must be aware of one’s needs and aspirations, know one’s options, as well as, the pros and cons of each option. The writer also points out that every national economy is composed of five sectors: government, household, business, financial and foreign (sector).

Pink brain. Abstract art is open to interpretation, so are normative economics. Unlike factual or objective economics, normative economic statements assess the 'ought' part of the discussion. Image: © Megan Jorgensen (Elena)

While the above is true at the micro (firm or individual) level, the statement remains correct at the macro level (or involving governments, large corporations and the economy as a whole). Consequently, the PPB (Production Possibilities Boundary) illustrates this phenomenon for a country’s economic activity. As production efficiency increases with progress in science and technology, the PPB shifts to the right. Points outside the curve mark production combinations as yet unattainable, while points below the curve designate unemployed or underemployed resources.

Economies of scale and of scope reduce production cost, thus enhancing efficiency. Also, the competition fostered by a free market economy is conducive to innovation, technological breakthroughs and constant, relentless pursuit of excellence. Nonetheless, some regulations are fundamental to a society’s long-term well-being, which helps understand why most of today’s nations are mixed economies (coordinating Adam Smith’s invisible hand and laissez-faire postulates with governmental intervention).

Demand and supply need both: a desire and an ability to buy and sell, respectively. As usual, when demand equals supply, the market is in equilibrium, otherwise there appear surpluses and shortages.

References:

• Matziorinis, K. N. (2008). Business Economics: In Theory and Practice, 5th ed. Canbek Publications: Quebec, Canada.
• Marshall, A. (1890). The principles of economics. Retrieved January 21, 2012 at socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/marshall/prin/index.html

Copyright © 2012 Megan Jorgensen. All rights reserved.