Homo Economicus Definition
Homo Economicus is a term used to describe the rationalism of human being also known as economic human economicus showing an ability of a human being to make a rational economic decision in their day to day life, fulfilling their wants, desires, and needs in an optimal manner, which is required since various economic theories assume that the person is a rational individual.
Examples of Homo Economicus
The term homo economicus takes into consideration, a human in social science, particularly in economicus being capable of making rational decisions for themselves, seeking their best interest in every particular aspect like bargaining, consumption, saving, purchasing, selling, making investment decisions, etc. Hence following examples may explain this theory in a better manner.
Suppose there are two markets in a particular location. In both, the markets particular product is getting sold. Now, in market 1 the product is getting sold at $500 while the same product is getting sold in the market 2 to $700. Now left the home economic theory is true then the person will always choose to buy the product from market 1. Does when a person buys a product in market 1 there is a next saving of $200. This is known as a rational decision.
Another example, now let us assume that the two markets are in different locations market one is located in another state while the market is located in the same state of the customer. Transportation cost from market 1 to the home of the customer is $ 300. Does in this situation the customer would buy the product from the market instead of market one since the overall cost of purchasing the product from the market is $800 including the transportation charges which will make him incur a loss of $100 instead of making a net saving of $200.
- The concept of homo economicus is widely used as an assumption in various theories of economicus and this concept helps various economists to prove their concepts in a better manner and helps in making various decisions of the economy like demand and price, consumption habits of the people, etc.
- The concept of the national economy has been used in the theory of demand to protect the demand based on various price levels in the market. Hence it helps to use the linear demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal., i.e., a higher price may reduce the demand to the lower level.
- The model of a perfectly competitive market assumes a rational man and that the demand of the same is maximum at a given level of price and will highly respond to a change in price.
- People’s attitudes towards a particular product may change due to change in the connected losses regardless of the risk and gains involved. hence the theory of economic man or homo economicus may be disadvantageous to use.
- The theory of rationalism would be of no use in a situation of luxury items. Even though it costs more to a person, but the impact of luxury items make a person make irrational decisions.
- Homo Economicus may prove to be a hypothetical concept or theory. This theory says that a human is self-interested, have perfect knowledge about various markets, he or she knows what they want and how they want, which is in practical life not purely possible.
- It may be such that people are not always self-centered. People may take decisions that are not for their own benefit, not for making maximum benefits or themselves. Hence there are circumstances where instead of our own, decisions are taken based on social preferences even though it is not incurred by minimizing the costs.
- Sometimes decisions are taken under uncertain circumstances. Also, it happens that certain decisions are taken without having the proper knowledge or incomplete knowledge. In that case, the decisions taken by a person may be irrational. Hence homo economic definition does not gets proved in those circumstances.
- It may so happen that certain situations make a person lose their self-control which makes them take wrong or irrational decisions.
- The taste and preference of a person tend to change over a period of time. Hence a change in preference of a person makes him or her make a decision, which he or she might not have taken before.
- Hence it can be said that homo economic definition might prove to be a limited concept due to change in the preference of human beings.
- Gift-giving has always been a very important part of social interactions. We offer them to people with an expectation of better welfare, fame, and relations.
- Sociologists, psychologists, behavioral economists, etc. play a very important role in the concept of homo economicus. They help a person in making rational decisions in case of certain critical circumstances.
- The origin of an economic man has been discussed in a book where the author states that the political economy usually abstracts human motives while the taste and propensities of the individual are passed on from one generation to another. The author further explains that if the parent will have the preference if a high-quality life, the next generation will most probably have the same preference.
- The idea of homo economic might change due to change in risk aversionRisk AversionThe term "risk-averse" refers to a person's unwillingness to take risks. Investors who prefer a low-return investment with known risks to a higher-return investment with unknown risks, for example, are risk-averse., thus if the person is highly risk-averse, even though it is rational to act in a particular way, he or she might not act in that very manner.
From the above discussion of the rationality of a human being, it is very clear that this theory has proved so many theories, can help to theories to reach out to a particular conclusion. Further, the concept of home economicuss has been criticized by a lot of economists so far, which may be considered while making a particular decision, while on the other hand this theory is is a very basic theory in economicus and hence cannot be ignored completely.
This has been a guide to homo economicus and its definition. Here we discuss examples of homo economicus along with advantages, disadvantages, and limitations. You can more about finance from the following articles –