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Second objection: people, firms, and society should not act this way

The economics approach portrays people as self-interested. For some critics of this approach, even if self-interest is an accurate description of how people behave, these behaviors are not moral. Instead, the critics argue that people should be taught to care more deeply about others. Economists offer several answers to these concerns.

First, economics is not a form of moral instruction. Rather, it seeks to describe economic behavior as it actually exists. Philosophers draw a distinction between positive statements , which describe the world as it is, and normative statements , which describe how the world should be. For example, an economist could analyze a proposed subway system in a certain city. If the expected benefits exceed the costs, he concludes that the project is worth doing—an example of positive analysis. Another economist argues for extended unemployment compensation during the Great Depression because a rich country like the United States should take care of its less fortunate citizens—an example of normative analysis.

Even if the line between positive and normative statements is not always crystal clear, economic analysis does try to remain rooted in the study of the actual people who inhabit the actual economy. Fortunately however, the assumption that individuals are purely self-interested is a simplification about human nature. In fact, we need to look no further than to Adam Smith , the very father of modern economics to find evidence of this. The opening sentence of his book, The Theory of Moral Sentiments , puts it very clearly: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” Clearly, individuals are both self-interested and altruistic.

Second, self-interested behavior and profit-seeking can be labeled with other names, such as personal choice and freedom. The ability to make personal choices about buying, working, and saving is an important personal freedom. Some people may choose high-pressure, high-paying jobs so that they can earn and spend a lot of money on themselves. Others may earn a lot of money and give it to charity or spend it on their friends and family. Others may devote themselves to a career that can require a great deal of time, energy, and expertise but does not offer high financial rewards, like being an elementary school teacher or a social worker. Still others may choose a job that does not take lots of their time or provide a high level of income, but still leaves time for family, friends, and contemplation. Some people may prefer to work for a large company; others might want to start their own business. People’s freedom to make their own economic choices has a moral value worth respecting.

Is a diagram by any other name the same?

When you study economics, you may feel buried under an avalanche of diagrams: diagrams in the text, diagrams in the lectures, diagrams in the problems, and diagrams on exams. Your goal should be to recognize the common underlying logic and pattern of the diagrams, not to memorize each of the individual diagrams.

This chapter uses only one basic diagram, although it is presented with different sets of labels. The consumption budget constraint and the production possibilities frontier for society, as a whole, are the same basic diagram. [link] shows an individual budget constraint and a production possibilities frontier for two goods, Good 1 and Good 2. The tradeoff diagram always illustrates three basic themes: scarcity, tradeoffs, and economic efficiency.

The first theme is scarcity    . It is not feasible to have unlimited amounts of both goods. But even if the budget constraint or a PPF shifts, scarcity remains—just at a different level. The second theme is tradeoffs . As depicted in the budget constraint or the production possibilities frontier, it is necessary to give up some of one good to gain more of the other good. The details of this tradeoff vary. In a budget constraint, the tradeoff is determined by the relative prices of the goods: that is, the relative price of two goods in the consumption choice budget constraint. These tradeoffs appear as a straight line. However, the tradeoffs in many production possibilities frontiers are represented by a curved line because the law of diminishing returns holds that as resources are added to an area, the marginal gains tend to diminish. Regardless of the specific shape, tradeoffs remain.

The third theme is economic efficiency , or getting the most benefit from scarce resources. All choices on the production possibilities frontier show productive efficiency because in such cases, there is no way to increase the quantity of one good without decreasing the quantity of the other. Similarly, when an individual makes a choice along a budget constraint, there is no way to increase the quantity of one good without decreasing the quantity of the other. The choice on a production possibilities set that is socially preferred, or the choice on an individual’s budget constraint that is personally preferred, will display allocative efficiency.

The basic budget constraint/production possibilities frontier diagram will recur throughout this book. Some examples include using these tradeoff diagrams to analyze trade, labor supply versus leisure, saving versus consumption, environmental protection and economic output, equality of incomes and economic output, and the macroeconomic tradeoff between consumption and investment. Do not be confused by the different labels. The budget constraint/production possibilities frontier diagram is always just a tool for thinking carefully about scarcity, tradeoffs, and efficiency in a particular situation.

The tradeoff diagram

Two graphs will occur frequently throughout the text. They represent the possible outcomes of constraints/production of goods. The graph on the left has “Good 2” along the y-axis and “Good 1” along the x-axis. The graph on the right has “Good 1” along the y-axis and “Good 2” along the x-axis.
Both the individual opportunity set (or budget constraint) and the social production possibilities frontier show the constraints under which individual consumers and society as a whole operate. Both diagrams show the tradeoff in choosing more of one good at the cost of less of the other.

Questions & Answers

what is demand ?
Tonight Reply
The amount of some goods or services consumers need to purchase
Adu
what are subsidies
Yaya Reply
how do trade unions deal with subsidies
Yaya
bro can you explain decision making
WhatsApp
Decision making is a process to use your limited resources for best productive purpose.
Dipam
explain why an increase in national income may not always lead to improvement in economic wellbeing of all the citizens?
Mendo
what is the marginal revenue if p=10-2q
Karen Reply
what's the difference between demand goods and supply gooda
Spiff Reply
why is 2% the optimal inflation rate in many countries
Spiff
why is 2% the optimal inflation rate in many countries
Spiff
what's inflation
Thando Reply
a general rise in the prices of services and goods in a particular country
Spiff
why is 2% the optimal inflation rate in many countries?
amina
resulting in a fall in the value of money,,
Spiff
for example
Spiff
Inflation is the continuous rise of price of goods and services in a nation
Oluchi
what will the effective demand if inflation is constant and real wage is less then money wage ?
Vipul Reply
to start
Dennis
to start with your question i think we have to break it down into key words, and they effective demand ,inflation and real wages ... Ok when we say demand is effective we mean the demand is backed up by capital .. it is backed up by the ability to pay for the good/commodity demanded for
Dennis
in other hand inflation is the persistent rise of goods and services in and particular country's economy
Dennis
so what is real wages it means the amount paid to labour for a particular work done
Dennis
money wage is the money/capital paid to a worker
Dennis
knowing this terms you can be able to answer your question....
Dennis
What is monopoly
Oluchi Reply
I believe that a market is monopolistic if there is no competition. in other words, a given company is the only one offering the product/service.
amina
am a fan of monopoly
Okeke
it is correct
Spiff
and in other word,,, is a thing that belongs to one person or group that another people will not able to share
Spiff
a single seller and large number of consumer
Vipul
A monopoly is a firm that is the sole producer of a good or service for which there are no close substitutes. It exist because of barriers to entry. The barriers can be legal or natural.
Dennis
Ok
Oluchi
give tree difference between economic good and free good
Gideon Reply
what is want
Wasila Reply
anything just come from your heart
domingo
no matter how much you give
domingo
is what you desire to have
Tsai
their the human desire it's need(s).
Gideon
YES
Erik
like medicine food etc
domingo
price floor support producer or consumer?
Mastercorner Reply
support for consumer
domingo
what is antagonist
Edward Reply
Hi
Odidi
hw ar u
Mohamed
fine and you
Timah
Hi
moha
hw ar u
Mohamed
i'm not good due to corona virus
domingo
hi
Un
i would like to ask you for a little help to get rid of the corona virusand we have nothing to offer. thank you very much.
domingo
kk
Mohamed
how to get the donation?
domingo
to feel sympathical ideas we 'll get donation and to tell a great religious reward
Inno
what are the factors influencing the level of advance made by commercial banks?
Kobwa Reply
What is Demand and supply
Felix Reply
supply is the ability to sell goods and services at the specific period of time and at the specific price
Kobwa
demand is the ability and willingness to buy goods and services at the specific period of time and at the specific price
Kobwa
what is demand
Sanni Reply
Sanni Saoban, Demand is a kind of need which is backed up by ability and willingness to pay.
Dipam
Demand is the various quantities of goods and services that a consumer is willing and able to buy at various prices within a given period of time
Sharon
Demand means desire for a commodity willingness and ability to purchased that commodity
Bhagabata
desired of good and services, when you try to sell something , you make the buyer need that something in a way that person buys the good or service from you. SUPPLY AND DEMAND
Erik
Am I right or wrong
Bhagabata
ryt
Oppong
demand means the desire for product and being able to purchase goods
Rameez
He or she must have willingness
Bhagabata
buy and sell orders on the foreign exchange.
ay
it is the various quantities of goods and services a consumer is willing and able to buy at a price at a period of time
Gideon
why should a firm close down when it's unable to pay it's variable cost?
ANDREW Reply
what is oligopolistic competitive market?
ngong
oligopolistic market is the market structure characterized by few sellers with large firm and mostly they produce goods that are differentiate & homogeneous goods
Kobwa
less demand due to assumptions
Inno

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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