The fundamental of economics
Only individuals choose
Economics is a social science that studies how people make choices among the alternatives readily available to them. Economics is dictated by the purposes and choices of individuals but not by the society as a whole. Although the choices of man are directed towards his own self-interests, they cannot deviate from the general public’s interest. For instance, a man may decide to start a butchery or a restaurant. However, a closer look will show you that the man has set up for the public’s best interest. All decisions made for the self-interest of man will end up as consequence of society’s best interest.
Individual choices and economics
Choices have consequences. This is a very popular term applied to every encounter in our lives. Economics in itself is a study of choices. These choices can only be made at an individual level because society lacks the proper faculties to make choices. Just as we come together to make up a society, it is our choices that influence the economy. For example, high unemployment rates, high gasoline prices or massive national debts are all choices that have a significant impact on the economy of a nation.
Fundamental economics state that, our resources are limited, but our needs and wants of these limited resources are virtually unlimited. If in case resources were unlimited, and we would have access to every want we have, then there would be no economics. Therefore, as we make choices, we have to say yes to some wants and in the process say no to others. This is a scarcity condition that makes us choose among many alternatives.
The choice of its use requires that another be given up. For instance, a parcel of land presents us with alternative uses. A parcel of land may be used to build a house, set up a petrol station or even a mall. However, we may decide to leave the parcel land empty so that we can be able to make the best decision on the use of the piece of land. Therefore, since land is a scarce resource, society must make choices on how best to use it. In the same way, we have to make choices on how best to use our scarce resources.
Fundamentally, this concept has been integral in the development of economics. Adam Smith showed a famous metaphor of the invisible hand to give an example of a positive unintended consequence. He claimed that as individuals, we are motivated by an invisible hand to promote an end which is not part of our intention in the process of seeking our own gain. He gave an example that; it is not out of the goodwill of the baker or the hotel keeper that we get our dinner, but by pursuing their own self-interests. Such an invisible hand helps to reach equilibrium automatically.
The law of unintended consequences, however, sheds light on the effects of government legislation and regulation. In 1692 for example, the British parliament wanted to pass a bill that was designed to cut the rate of interest by 2%. However, the economist John Locke urged the defeat of the bill. He argued that, instead of being beneficial to the borrowers, it would hurt them. This is because people would always find ways to bend the law and the borrowers would be the most affected. (Source)
Another example, in the US, the body that controls and regulates the manufacture and introduction of drugs which is the Food and Drug Administration creates very many unintended consequences from their action of regulating pharmaceutical drugs. This is because this regulation has caused so many deaths by the slow introduction of drugs which would have otherwise saved lives. Many people who would have otherwise lived die as a result of unintended consequences. (Source)
So, what are you willing to forgo in order to get something you want?
To be continued.