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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

how environment affect demand and supply of commodity ?
Amos Reply
Wht at the criteria for market ?
Amos
what is difference between monitory policy and fiscal policy?
Malik Reply
monetary policy is a policy thrust by National Govt(CBN) to influence government spending, purchase &taxes
Frank
necessity of economics
Pamela Reply
I will say want,choice,opportunity cost,scarcity,scale of preference
Alao
what is monopoly market.How price output are determined under monopoly market
bisham
b) Monopoly market is an impecfect market where s single firm having the innovation to produce a particular commodity.Prices are determined through output since there are no other competitive.
Frank
Monopoly market:firm has market power & does not respond to market price
Frank
Explain the process of price determination under perfect competition market with suitable diagram
bisham Reply
Price determination under perfect competition via this process :firms have no market power to influence price rather firms respond to market price.
Frank
price is different from demand- demand is amount of commodity
Effah Reply
demand is amount /quantity of commodity a potential buyer is willing to buy at a given price at market
Frank
demand is a desire of customer on commodity with the ability to pay it and willing to buy it at given price of commodity
Harika
demand is price of what
Faith Reply
show that shortrun average cost
Baby Reply
what is economics
Mbah Reply
what is money
Mbah
what is money
Mbah
Difine macro economics
agaba
money is a medium of exchange between goods and services,maybe inform of currency.
Wesonga
Economics is study of how human beings strive to satisfy numerous wants using limited available resources.
Wesonga
how do you find the maximum number of workers the firms should employ order to produce where there are increasing returns
Jane
what are implications of computing national income?.
agaba
pl
MUDASIRU
what is the formulae for calculating national income
MUDASIRU
it calculated by value added method
Praveen
classify the production units like agriculture, banking, transport etc
Praveen
money is anything that is generally acceptetable for human
Ogbaji
Estimate the net value added(NVA) at fixed cost by each industrial structure
Praveen
definition of unemployment
Adam Reply
what are the causes of unemployment?
Mbubi Reply
The main causes of unemployment are listed below. 1. Frictional unemployment 2. Cyclical unemployment 3. Structural unemployment
assani
We can also categorize the causes on a broader sense as: 1. Political and 2. Social cause As unemployeement root causes are embaded in this two.
Yonathan
would opportunity cost exist if there was no scarcity?
assani
yes just because the opportunity cost arose when there is Alternative to choose among the alternatives.
BADAMASIU
I am thinking that, if our resources were unlimited, then there wouldn't be any need to forgo some wants. Hence the inexistence if opportunity cost
assani
Politics
Job
politics has done what?
assani
consider time assani
Mary
I'm Emmanuel,...I taught the main cause is the change in gov't.
Emmanuel
...Lack of capital to set up a firm respectively
Emmanuel
🙈
Emmanuel
I would like to bring in Educational levels can also be the cause the cause of the problem respectively
Emmanuel
I think the main causes of unemployment is lack of INFRASTRUCTURAL DEVELOPMENT OVER POPULATION OVER DEPENDENT ON GOVERNMENT LACK OF SELF EMPOWERMENT...
ananti
lack of skills among the new generation is the serious issue.
Vishal
Where I come from , I don't see why education or personal aspects seem to do with unimployment, technically the motivation and eigerness in all works of live is there , dispite the cultural influence and physical bearriors;the thing we lacking is Government Support and open market ethics.
Joe
sorry about that-(repation). We have a over powering ethical political system that's displacing the marketing asspects of economy and causing large scale unemployment right across the board...
Joe
can someone Explain Expansionary Monetary Policy and Contractionary Monetary Policy Using one of the instrument of Monetary Policy? Please am kinda lost here?. ta
Emmanuel Reply
using a graph show the case of substitute and compliment goods
Ade Reply
can anyone give me a simple explanation to Five Sector Macroeconomics?
Emmanuel
Can someone please define what economics is
jason Reply
economics simply is a social science subject that study human behavior.
dajan
economics is a social science which studies human behaviour as a relationship between ends and scarce means that has alternative uses
Alao
Can someone please tell me how to calculate GDP
Emmanuel
emmanual kapal to calculate GDP (Gross Domestic Product) has three method in calculating it (1)income approach (2) expenditure approach (3) value added method
Alao
thanks Alae
Emmanuel
u are welcome
Alao
in basic terms economics is revered to as battery system, it date back to when Men sees the need to exchange sapless goods and produce to gain , either wealth , basic necessities or to establish trading ties for personal benefit or social asspects in terms of coexistence and continuity, future .
Joe
what is the law of demand
Berlinda Reply
keep other thing constant, when the price increases demand decrease when the price decreases demand increases of the commodity.
sj
all things being equal,quantity demanded decrease as price increase and increase as price decrease
Seth
there's practial joke to it ..." the higher the demand ; scarcity, increase in production and drop in quality"... quite the controversy - for example China vs Europe, United States and we are all boxed up in between somewhere...
Joe
Other thing remain constant the low price of commodity the high quantity of commodity and vice versa is true
Baraka
Explain Effective demand
Anita Reply
What is effective demand
Anita
like Modi is in demand...best example of effective demand
Pranav
Don't get you
Anita
Anita you mean you don't get me or who?
Onyeking
level of demand that represents a real intention to purchase by people with the means to pay
Pranav

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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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