Even though the word "economics" is most associated with the study of wealth and finance, at its core the discipline examines how and why people make choices. Some researchers argue every problem studied by economists ultimately boils down to the study of individuals making decisions about what to do. Choice is the central object of study in the discipline.
Choice and Scarcity
In economics, a choice is a decision someone must make about what to do with limited resources, according to Economics Wisconsin, a guide for social studies teachers. In this usage, anything from timber to money to the number of hours in a day can be a resource. The key factor is for a choice to be made, the resource has to be limited, or, in economics terminology, scarce.
For example, imagine that you have $1,000 in the bank at the end of the month. You face choices about how to spend that money. You can pay your rent and your utility bills, buy groceries, and maybe head to a movie. Alternatively, you can book a flight to Disneyland. You can't do all those things, however, because your resource – money – is scarce. If you had a bottomless pit full of money, however, you wouldn't have to make any choices. You could do anything.
Rational Choice Theory
A fundamental assumption of most modern economic theory, according researchers at Stanford University, is the idea that people make choices that serve their own self-interests. This idea, called rational choice theory, attempts to explain and predict how people choose to allocate their limited resources.
In the example above, rational choice theory would probably predict that you would elect to pay your bills instead of flying to Disneyland. While you might have more fun at a theme park in the short term, you know it would be bad for you to blow your grocery money. Of course, you might rationally decide to go on vacation if circumstances changed. You might opt to take that big trip early, for example, if you knew you were going to get a big bonus next month.
Understanding Irrational Choices
One of the hotly debated questions in economics is why people often make choices that appear irrational. For example, many people would drive across down to save $10 on the grocery bill, but they wouldn't drive across down to save $10 on the purchase of a $1,000 computer. Behavioral economists often argue these sorts of paradoxes suggest rational choice theory is fundamentally incorrect and that people do not make rational decisions.
A less controversial explanation is that people sometimes lack the information required to make rational choices. For example, many people will spend extra money on brand-name items even though off-brand items are sometimes identical. The explanation for these choices may be that consumers simply don't know the relevant information. Either way, economists will continue to place study of individuals' choices at the center of the discipline.