Major Laws of Economics

Economics is the study of how people use resources to satisfy their wants (Van Sickle,
1964). This definition states the importance of economics to human society. Economics as aims to
provide an explanation to how we behave, as humans, in regards to the production, distribution,
and use of resources. As such, the study of economics has grown through the years since its
inception, and various laws were put out to act as frameworks to the many ideas that govern and
define it as a whole.
1. Law of Scarcity of Resources
The Law of Scarcity of Resources states that economics resources—land, labor, capital,
and talent—are limited, not infinite (Kerim KARA, 2017). Scarcity is the most basic problem in
economics. It refers to the gap between wants of people, which are virtually unlimited, and
resources, which are limited, that are needed to produce the goods to satisfy the people’s wants
(Van Sickle, 1964).
2. Law of Demand
The Law of Demand states that the quantity demanded varies inversely with price, other
things constant. Thus, the higher the price, the smaller the quantity of demand, and vice versa
(McEachern, 2006). Demand indicates how much consumers are both willing and able to purchase
the good.
3. Law of Supply
The Law of Supply states that the quantity supplied is usually related to its price, given that
other things are constant. Thus, the lower the price, the smaller the quantity supplied, and vice
versa. Supply describes the relation between the price of a good and the quantity that producers
are willing and able to sell during a given period, other things constant (McEachern, 2006).
4. Law of Supply and Demand
The Law of Supply and Demand explains the interaction between the supply of a resource
and the demand for that resource. Generally, a low supply and high demand increases price, and
in contrast, the greater the supply and the lower the demand, the lower the price tends to fall.
Supply and demand pull at each other until an equilibrium is reached. This equilibrium defines
which price is the best so that both supplier and consumer won’t lose out on each other. This makes
it so that there is no pressure between both of them (Karlan, D. and Morduch, J., 2014)
5. Law of Marginal Utility
This law states that the more a person has of something, the less he values any one unit of
it. (McEachern, 2006). It describes the increase in satisfaction that a consumer derives from
consuming one more unit of good or service.
6. Law of Diminishing Marginal Utility
The Law of Diminishing Marginal Utility states that the more of a good a person consumes
per period, other things constant, the smaller the increase in total utility from additional
consumption—that is, the smaller the marginal utility of each additional unit consumed
(McEachern, 2006). Utility is the power of a good to satisfy human wants (Van Sickle, 1964).
7. Law of Diminishing Returns
The Law of Diminishing Returns states that an increasing number of units of one resource
are applied to a fix number of units of other resources, output first increases at an increasing rate,
then at a diminishing rate, and eventually decreases absolutely. It defines the relationship between
inputs (resources) and outputs (goods and services), with a given level of technology (McEachern,
2006).
8. Law of Increasing Opportunity Cost
The Law of Increasing Opportunity Cost states that to produce each additional increment
of a good, a successively larger increment of an alternative good must be sacrificed if the
economy’s resources are already being used efficiently (McEachern, 2006).
9. Law of Comparative Advantage
The Law of Comparative Advantage states that the individual, firm, region, or country with
the lowest opportunity cost of producing a particular good should specialize in that good
(McEachern, 2006). Opportunity cost is the value of the best alternative forgone when an item or
activity is chosen (McEachern, 2006).
10. Law of Absolute Advantage
The Law of Absolute Advantage that the individual, firm, region, or country with the
lowest cost of producing a particular good should specialize in that good (McEachern, 2006).
Absolute advantage focuses on who uses the fewest resources, but comparative advantage focuses
on what else those resources could have produced—that is, on the opportunity cost of those
resources.