Running head: ECONOMIC PERSPECTIVE
Economic perspective
Student’s Name
Institution
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ECONOMIC PERSPECTIVE
Economic perspective
Introduction
An economic perspective is a manner of thinking that assists individuals and organizations in making decisions that are realistic. People make these decisions by comparing the costs and gains that are marginal that reflects directly to the individuals or the organizations actions. Economic perspective emphasizes on the allocation and distribution of resources.
Institutions are humanly devised constraints, and they as well have a social interaction, economic and political structure just like the humans. They contain informal constraints, for example, codes of conduct, taboos, customs, traditions and sanctions. Mores so their formal constraints include the property rights, laws and constitution.
Economic perspectives in institutions through the help of humans has been encouraging order, thus reducing uncertainty in exchange. In combination of standard constraints of economics, they assist in defining the choice set, therefore, determining transactions and the costs of production, hence the profits and feasibility of involving these activities that involve economics. The economic perspective evolves incrementally; thus, it connects the past, the present and the future. Doing so, the history in consequence portrays an evolution institutional story that is seen as a sequential story. The institutions help in the provision of incentive structures of the economy, as the structure evolves, and it leads to the direction of economic change, of the institutional performance that can be growing, stagnant or declining. In an economic perspective, the institutions that give permission to transactions of low costs and productions in the world of division of labor and specialization require to solve the problem of cooperation in humans that will have an influence at a later date. There is consumption of
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ECONOMIC PERSPECTIVE resources in the definition and enforcement of the exchange agreements, despite having a common goal, for instance maximization of organizations profits. The transactions in the agreements take substantial resources. Though in the view of personal maximization of wealth, behavior and asymmetric information that concern the attributes that are valuable of what is in exchange. The costs of transactions are important determinations of the economic performance.
The costs of transactions gain influence from the effectiveness of the enforcement that include the mode of technology in use. The economic perspective helps effective institutions in raising the gains that come from the cooperative solutions or the costs of defection. In the case of transaction costs, the institutions reduce the costs of production and the costs of transactions per exchange so that they can achieve realizable and potential gains from the trade. Important parts of the institutional matrix are from both the economic and political institutions.
Resources used for production such as labor, machinery, tools and land are within the society and are always employed in the economy in production of goods and services that satisfy wants. However, the productive capacity of the scarce resources is always overwhelmed by economic wants. Therefore; forces people to make optimal choices under these conditions of scarcity. Given the many factors and situations within the economy, Economists always have a unique point of view as to how these situations occur. This economical way of thinking explains factors that influence people and organizations in their economic choices and decisions. From an economic perspective, these decisions are made by making comparisons between the marginal benefits and costs. The economic perspective, therefore; is the point of view that ideates rational decision-making by institutions and individuals through equating the marginal costs and benefits related with their actions.
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ECONOMIC PERSPECTIVE
The economic perspective has several key and interrelated features. These include; scarcity and choice, purposeful behavior and marginal analysis. Scarcity of economic resources results into limited goods and services within the economy. It reduces the available options to choose from and, therefore, prompts the need to make choices. Since it is not possible to have everything, people must choose what to have and what to forgo. At the centre of economics is the idea that “there is no free lunch." A lunch treatment may seem free from a beneficiary’s perspective, but someone will have borne the cost. Ultimately, this cost will be considered as borne by the society since all resources are owned by partners or individual members of society.
In making the lunch, scarce resources of land, equipment, farm labor, labor of cooks and waiters and managerial talents are needed. While making the lunch available, the society sacrifices other goods and services. Such sacrifices are referred to as the opportunity cost. Getting one thing leads to a foregone opportunity of getting the next best thing. The sacrifice becomes the opportunity cost of the choice made. In general, free goods or services may be at no cost to individuals receiving them but never free to the society.
Opportunity cost is an important concept that plays a role of ensuring that scarce resources are efficiently used. Opportunity cost is not restricted to financial or monetary costs, but overall cost of output forgone. Any pleasure lost time or other benefits that provide utility must be regarded as the opportunity cost. However, people forget or find difficulty in applying this concept in everyday life. Given that every resource like money, land, time, etc. can be subjected to alternative uses, every action, choice or decision has a related opportunity cost.
Opportunity cost is, therefore, a fundamental concept in determining the cost-benefit analysis of the project. For example, before deciding whether to use a piece of land for putting up a building in town, a cost-benefit analysis must be computed. In this case, opportunity cost is the cost of
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ECONOMIC PERSPECTIVE using a piece of land as a sports centre or the cost of selling a piece of land. Purposeful behavior is another key feature of the economic perspective. From an economic perspective, utility and purposeful behavior has an important relationship that can be explored. Utility in this case implies pleasure, happiness or satisfaction achieved through participating in an exercise. People use scarce resources such as money, time and energy to get the best utility possible. Purposeful behavior varies with goals, actions, means and choices of individuals.
In economics, it is an assumption that people makes decisions and choices that are rational self-interest. People will always go after opportunities that will lead to an increase in their utility. To maximize their satisfaction, they allocate time, energy and money. People’s economic decisions are, therefore, purposeful and rational rather than random since they are based on weighing of costs and benefits. The purposeful behavior shows that consumers choose what goods to buy purposefully. On the other hand, firms purposefully choose what products to produce and their means of production. At the same time, government entities purposefully choose services they hence provide means of financing them. Despite other factors that may influence people’s decisions such as emotions and neighbors; people make decisions with desired outcomes in mind. Self-interested behavior is, therefore, intended to increase personal satisfaction as much as possible.
The economic perspective is important in analyzing a lot of behaviors. For instance, people intend to go to shorter queues as compared to long ones because they believe shorter queue will minimize their time cost in getting what they want. It is based on their recognition of time being a scarce resource that should be put into utilization of other things other than standing on the queue. In so doing, they are acting purposefully. This purposeful behavior should not be confused for selfishness. People sacrifice their time and money while contributing in charities
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ECONOMIC PERSPECTIVE which, in a way, gives them enough satisfaction or pleasure as goods and services do. Despite the other features, the economic perspective has a great focus on marginal analysis. Marginal analysis is a key economic analysis that entails decision making which is focused on comparing marginal benefits against marginal costs. Marginal in this point of view means an extra or additional. Making decisions or choices result into a change of the existing situation or state of affairs in the economy.
When doing marginal analysis, there is a change of a variable. This variable can be the quantity of good an individual buys, the quantity of output produced or the quantity of input utilized in the production and is known as control. Therefore, marginal analysis is based on whether the control variable needs to be increased by a unit or not. For instance, business owners may want to make a decision on whether to increase or decrease the business outputs. The same way, the government, may want to reduce or increase the funding for a particular project. The two instances have two options each of either reducing or increasing the good or service in question. Each option, therefore, involves marginal benefit and, on the other hand, the marginal cost influenced by scarcity of resources. For a rational decision to be made from an economic perspective, the additional benefits of the decision must exceed the additional costs. For example, when a new teller is opened at the counter people already queuing in the banking hall have to choose whether to move to a new teller or stay put in their queue. Eventually, some will move to a new teller because of the marginal benefit of time saving exceeding the marginal cost of staying put other current queue. While deciding their move to a new queue, customers must consider how quickly they can move to a new teller compared to others who are also thinking of the same. In this scenario, customers do not have good information when they select queues and, therefore, not all decisions turnout as anticipated. For example, a client might join a queue and
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ECONOMIC PERSPECTIVE the person in front is doing multiple depositing of money or the person serving at the counter is a trainee. Nonetheless, at the time of decision making this was regarded as an optimal decision.
Economists believe that, the behavior of people at food places and service areas is a true picture of the general economic behavior. Because of the array of choices they have to make, consumers, workers and businesses have rationally to compare the additional benefits and additional costs in making decisions. It should also be noted that the value of the next best thing foregone (opportunity cost) is always present whenever a choice is arrived at. Since the reason for every company or individual to be in business is to make profits, marginal analysis enables business owners to decide on decisions that will ensure they maximize profits. It ensures that resources are utilized to get the most value out of them. It, therefore, helps businesses owners and individuals to make a balance between the costs and benefits of additional actions of consuming more, producing more or any other decision of that kind. Government policy makers also use marginal analysis in determining whether a generation of additional benefits can be achieved by allocating additional resources to a specific public program or project. From the discussions of the three key features of the economic perspective, it is clear that there exist a close relationship between the three. People use their scarce resources purposefully to maximize their utilities. As, people make decisions on how to use their resources they have to forgo some costs (opportunity cost). The decisions and choices made on the forgone costs and scarce resources are based on analysis of marginal costs and benefits. Marginal cost and benefits, therefore, represent the reference point for most economic decisions.
The economic perspective acknowledges that all choices have cost implications which must be factored in economic decision. Also acknowledged in this perspective, is the point of view that to achieve maximum fulfillment of goals; people and organizations make decisions that
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ECONOMIC PERSPECTIVE reflect their rational self-interest. In comparison to marginal benefits and marginal costs, people tend to choose a situation where the marginal benefits are greater than the marginal costs. The economic perspective, therefore, presents important viewpoints for making economically informed decisions by individuals, companies or institutions.
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