GB540 Unit 1 Discussion Topic 1

Self-interest and Economic Choices

The concept of rational choice is a frontier of economic theory. A fundamental assumption for economic analysis is that economic agents, a household and a firm, tend to make the best choices from among viable alternatives, given the available resources at their disposals (money, time, etc.) and information.

The rational economic choice implies that people are driven by the rational pursuit of self-interest, and engaged in economic decisions to maximize this rational self-interest. Self-interest is individual’s economic decisions that are made to fulfill individual’s best interest. On the other hand, social interest indicates choices that are made to benefit society as a whole. Economists argue that social interest can be attained by individual decision makers acting in their own self-interest. This process is what Adam Smith called the invisible hand, which is the foundation of the theory of the market economy.

• Give an example to demonstrate how a firm acting out of self-interest to maximize its profits by offering goods or services in economic markets benefits consumers – even if it does not care about them. In other words, how does self-interest help achieve society’s economic goals?
• What is the relationship between self-interest and social interest in the economic decision (economic choice) process? Is there a conflict between the two in the economic world?
• Do people always make rational decisions? What are the factors that lead to bounded rationality? What are the factors that lead to irrational economic decisions?