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Resource Owner Motivation
In a market economy, the resources are generally owned by private individuals. For instance,
each person owns his or her own labor. How do private individuals decide the most desirable use
for their resources?
Adam Smith addressed this question in his book “An Inquiry into the Nature and Causes of the
Wealth of Nations” (published in 1776). According to Smith, “It is not from the benevolence of the
butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own
interest.”
We assume that the basic resource owner motivation is self-interest. Each resource owner will
use whatever resources he or she owns to pursue self-interest. But what about the best interest
of society? Will the resource owner’s pursuit of self-interest also serve the best interest of
society?
According to Adam Smith, the resource owner’s pursuit of self-interest will generally serve the
best interest of society. According to Smith, the resource owner “intends only his own gain, and
he is in this…led by an invisible hand to promote an end which is no part of his intention…By
pursuing his own interest he frequently promotes that of society more effectually than when he
really intends to promote it.”
Why does the resource owner’s pursuit of self-interest generally serve the best interest of
society? Most resource owners have a self-interest to generate maximum profit from the use of
their resources. In a competitive market, this pursuit of profit-maximization will lead the resource
owners toward two actions that serve the best interest of society;
1. Resource owners will direct their resources to the use that is most highly valued by
consumers.
Example 9: Kris opens a donut shop featuring seaweed-based donuts. Unfortunately, consumers
find the donuts unappealing. If Kris wants to stay in business and have a chance to earn a profit,
she will have to change her donuts in response to consumer demand.
2. Resource owners will use their resources as efficiently as possible.
Example 10: Kris employs only persons with advanced degrees in nutrition at her donut shop.
Unfortunately, the high salaries of her employees make her donuts so costly to produce that they
are not competitive. If Kris wants to stay in business and have a chance to earn a profit, she will
have to use her resources more efficiently. She will have to employ the cheapest available
workers who can do an adequate job. She will have to produce donuts at the lowest cost (with the
least valuable combination of resources) that she can.
These actions serve the best interest of society by helping society to achieve the basic goal in
dealing with the problem of scarcity; produce as much consumer satisfaction as possible with the
limited resources available.
Opportunity Cost
The basic economic problem of scarcity means that people have to make choices. How will they
use their limited resources? Which of their unlimited wants will they satisfy? As they make these
choices, they are foregoing other desirable choices.
If resources are used to produce Good A, those resources are not available to produce Good B.
If income is spent on Good C, that income is not available to consume Good D. The value of the
best alternative surrendered when a choice is made is the opportunity cost of that choice.
Opportunity cost – the value of the best alternative surrendered when a choice is made.
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Scarcity and Choices 1 - 4