At the beginning of this statement, it is important to highlight why I feel the study of economics is important. The origins of the study of economics date back to a publication by a Scottish moral philosopher, Adam Smith. In his book titled, An Inquiry into the Nature and Causes of Wealth of Nations, the author sought to suggest reasons why people in some nations were wealthier than others (Gwartney, Stroup, Russell, and Macpherson 4).
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This fundamental question is very important to answer by people from all walks of life given that one of the main activities in life is work, which entails the acquisition of resources whose main use is to meet daily and future needs.
Economics is very much about the choices that individuals make, but these individuals are often grouped together in households, corporations, nonprofit organizations, but the underlying principle still remains the decisions made whether individually or as a group. One of the main reasons why it is important to make the right choices is the fact that the majority of individuals have a minimal amount of resources in hand.
However, there are a number of available resources which with ingenuity, can be transformed into valuable resources. This does not suggest that ingenuity alone is adequate to eradicate poverty because the resources available will never be able to satisfy human desires and needs entirely. Given this scenario, we can assume that scarcity will always be a part of life, and therefore, the process of making choices that is the key constituent of economics will always be an essential part of life (Gwartney et al. 6).
That being said, it is important to highlight the fact that scarcity and poverty are not the same. Scarcity refers to an actual situation where the resources required to meet needs are inadequate. At the same time, poverty is a situation that is best described by the indication of whether an individual meets a predefined level of income. Keeping that in mind, it is possible for poverty to exist in the absence of scarcity (Gwartney et al. 7).
In which case, this would suggest an inappropriate distribution of available resources is the cause of poverty. However, even if all the available resources were appropriately distributed, poverty may still exist owing to the fact that it is still an individual decision as t the use of the allocated resources. The distinction between needs and wants is the source of this problem.
Through developing an economical way of thinking, the individual develops a technique of thinking, which helps them draw the right conclusion. This is the reason why several economists may research a single problem and arrive at varied conclusions through the guiding principle used will be the same. Among the guiding principles underlying the decision-making process is the fact that in the use of scarce resources, trade-offs must be made. The choice to pursue any option is at the expense of an alternative option. Another principle is that individual choice should be purposeful and aimed at making the most of limited resources (Gwartney et al. 9).
In line with this last point, it is important to keep in mind that incentives play a role in purposeful decision making. The more benefits one is likely to gain by making the right decision, the more likely they will make the decision. It is also important to keep in mind that the decision is made at the margin between costs and benefits. This is the reason why a low cost-efficient product is likely to sell more than a high-cost excellent product.
In keeping with the economic way of thought, one must realize that information is essential, but its acquisition is costly. It is for this reason that approaches geared towards economic empowerment focus on the dissemination of information. It is also essential to consider any secondary effects that may arise from the decisions made. Failure to predict the secondary effects of a decision can lead to failure (Gwartney et al. 12).
Another of the principles is the fact that the value of a product is subjective to the individual. This suggests that the best decision is that which impacts the greatest number of people in a positive manner. The last of these economic principles lies in the fact that the best measure of a theory is its ability to predict. This suggests that good theories are consistent and help in the explanation of real world events, whereas poor theories will exhibit inconsistencies and must therefore be rejected.
That being said, the economic way of thinking is not without pitfalls that the economist must keep in mind and seek to avoid. One source of error could be the wrong assumption that all things will remain constant in practice as during the period of assessment. It is thus equally important to have a keen sense of accuracy as to the possible variances that could occur in practice (Gwartney et al. 16). Another potential pitfall in economic practice is the idea that good intent guarantees desirable outcomes.
As earlier mentioned, the secondary effects of a decision should always be considered. In addition to that, there is also the fact that statistical association alone is not adequate as evidence of a cause-and-effect relationship. Lastly, an economist must also always keep in mind that what is true for one may not be true for all. An assessment of a component can not be taken to be the same as the assessment of the entire object (Gwartney et al. 17). These variances must always be considered when making economic decisions. This last pitfall is, in fact, what differentiates microeconomics and macroeconomics, with the difference being focus on the component and the entire object, respectively.
Gwartney, James, D., Richard, L. Stroup, Russell, S. Sobel, and David Macpherson. Economics: Public and Private Choice. Mason, OH: South-Western Cengage Learning, 2008.