The Twin Laws of Economics

Now that I've outlined Austrian Economics specifically, I figure It would be best to backtrack, and cover the basics of Economics in general, so that any later commentary doesn't breed confusion through the use of unfamiliar terms. In that vein, the best place to start is at the immutable laws which direct our study and analysis. Every science or study has laws which govern the actions of its relevant parts, and many of these overlap. They include The Laws of Gravity, Motion, Thermodynamics, and many others too numerous and specific to go into here. Although Economics shares these (in that the actions we study occur in a universe where these hold true), its nature as a human, or social, science means that it must have laws that deal specifically with the concepts at hand. Many of you will likely have encountered these in the past, as they are usually the first material covered in a basic Economics class, but I would like to provide it here in case someone reading was not fortunate enough to benefit from a a class in Econ before.

Law of Scarcity

Economics, is, at its heart, "the study of the actions and choices people make when faced with inherently scarce resources". This is the clearest and most generally accepted definition of the field, and in it is contained our first law: The Law of Scarcity. Any resource you can think of, no matter what it is, how it is made, or what it is used for, is inherently scarce, in that there is a definitive amount of it in existence, and that amount cannot possibly be enough to satisfy all of the desires people have in relation to it.

To provide an example: We use wood and wood products for a lot of different things in the modern world. From construction, to paper, to starting fires and making sports equipment, many people and businesses need wood to satisfy their wants. Now, imagine that there were an infinite number of trees in the world, and that every time we cut one down, another one would spring up, full grown, right in its place. If this strange phenomenon were to take place, do you think we would consume more wood? Of course we would! Wood would be so plentiful that it would be cheap, if not basically free, and people would find ways to use whatever quantity of wood to do whatever we needed. However, because there are NOT an infinite number of trees, we can only produce so many things from wood, and therefore our ability to produce wood-related goods is limited by the amount of wood we have available.

This is true for EVERYTHING in the world, from water, air, and time to computers and gasoline. Nothing is infinite, and because of that we can't produce everything we want to from a given resource.

Law of Opportunity Cost

The second law which governs our study of Economics is both a corollary of the first law (its truth depends on the truth of the Law of Scarcity), and a law in its own right (due to the significance of the phenomenon it describes). Its name is The Law of Opportunity Cost, and it helps to explain the basic nature of decision making.

Because all resources are scarce, people cannot make all the things they would want to make from a given resource, because there are natural limits on our ability to consume it. Because of this, any time we decide to consume a resource, either directly or by making it into something else, we give up the opportunity to consume it in a different way. This forgoing of a type of consumption, and the utility which we do not gain by forgoing it, is Opportunity Cost. Now, opportunity cost is important to understand, because not having a solid grasp can make economics almost impossible to figure out. When we talk about opportunity cost, we are concerned solely with the cost associated with the highest valued alternative to the method of consumption we chose: we are not concerned with adding up all of the costs of all the other options we had.

Let's go back to wood. One of the most important things we produce from wood is paper, and most of us consume a lot of paper on any given day, in many different fashions. Because of this, a large portion of our consumption of wood is indirect, and is achieved through a consumption of paper. However, by turning all of this wood into paper, we (as a society) forego the option to use more of that wood to do things like build houses and furniture, and this other use is the next best thing we could do with our supply of wood. Although we still use wood to do those things, we do not use as much as we could have, and that means that we have chosen not to gain the utility which those extra houses and furniture could have provided in exchange for gaining the utility that paper provides. In this case, the utility not gained by using wood for construction is the opportunity cost associated with making paper.

It is important to remember that factors beyond money are included in our measuring of utility and opportunity cost, and that anything that can help satisfy a person's wants is considered utility. The opportunity cost of me going to work for $9 an hour, for instance, is the utility I would have gained by using that hour to stay at home and sleep on the couch. The opportunity cost of ordering a chicken sandwich at McDonald's is the utility I would have gained by using that money to buy a hamburger instead. Because of this opportunity cost can be ephemeral or hard to measure, but since most economic calculations do not require a direct or specific measure of opportunity cost beyond defining its existence, this issue has little bearing on its study.

These two laws underpin Economics, and working together set the basis on which all Economic measures and judgments are made, as they serve to describe the setting in which people make decisions. Without these, any sort of economic model or calculation, regardless of how it was achieved, would be ultimately arbitrary or subjective.

Again, feel free to ask any questions or for clarification in the comments!