The Role of Choice in Economics

An important theory in economics is the choice theory. This analyzes why consumers make certain choices in a free market system and what factors drove the consumers to make these choices. In the United States, the largest free market economy in the world, consumer purchasing accounts for two-thirds of the economic pie. Such a large sector of the economy drives economists to understand how consumers use choice in their purchasing patterns.

Scarcity

An important part of economic choice is the scarcity of goods in the marketplace. Scarcity means that goods are limited in the marketplace, and consumers must choose wisely which items they will purchase to meet their needs or wants. Consumers will place an internal value on goods they purchase partly based on the available amount of the good. Scarcer goods will force consumers to purchase these items first, making the economic choice easier for them.

Opportunity Cost

Opportunity cost is the value given up when choosing to purchase one item over another. The item not purchased represents an opportunity cost, the second-best item available, that the consumer lost purchasing a different item. Consumers do not want to face large opportunity costs, so they will avoid purchasing items that are inferior alternatives. Most consumer choices have opportunity costs because consumers do not have an infinite supply of money to purchase every item they desire.

Market Sizes

The size of the free market has considerable effects on the role of choice in consumer economics. Larger markets with several manufacturers produce more goods, forcing consumers to choose goods in a potentially wide price range. Consumers usually choose the best-made product at the lowest cost to their budget. Multiple products and competitors will allow consumers to shop the marketplace for the absolute best economic value.

Substitute Goods

Substitute goods allow consumers to choose products that are reasonable facsimiles to the original goods they wish to purchase. The role of substitute goods is also affected by price; optimum goods may not be purchased by consumers if the price is outside the value range of consumers. Consumers will look for substitute goods in place of over-priced or poorly produced original goods.

Consumer Behavior

Consumer behavior is perhaps the most important part of choice theory in economics. Consumers must choose to save their income or spend it on goods above and beyond their normal needs for living. This extra income, known as discretionary income, will be spent on wants and luxuries deemed valuable to a consumer. Consumers with a conservative approach to spending choose to save their discretionary income, choosing the opportunity cost of present satisfaction for future satisfaction.

References

• Center for Economic Education
• Substitute Goods