Adam Smith's Rational Self-Interest

Assignment 1

1. Write an essay on the assumption of “Rational Self-Interest.” Make sure that you touch on each of the 3 components of this assumption that we discussed in class. Comment on the relevance of this assumption in our daily lives. Please explain how Adam Smith’s Invisible Hand Theory uses the assumption of Rational Self-Interest to show how society benefits.

Decisions are what determines the success of people, businesses and nations, a good decision could mean extreme wealth and a bad decision could mean the end of a business or friendship. Dissecting how and why you make these decisions is important to finding the path to success. Rational self-interest is an assumption of how we make our decisions or how we should make them.

This assumption is composed of three parts rationality, Recognition of Incentives and Self interest. When making these decisions one will begin by asking themselves is this decision rational, will it give me or others harm in the form of money, physical pain, or emotional loss. Then you will move on to ask yourself “am I motivated to do this?” Do I want this, maybe you have a cultural need to fulfill or a religious belief. finally you will ask yourself “what's in it for me?” Whether that's in the form of money, physical pleasure or emotional gain. To make the right decision the good must outweigh the bad. One of my recent decisions was to go back to college or spend more time on my personal interests. Rationally I did not want to go to college, the cost is extreme and the amount of time needed in very large. On the other hand the reward is great, it could mean a higher paying job, better status or the chance to be challenged. Also an added benefit to this personal interest will have great economic effects on my local area. Adam Smith’s Invisible Hand Theory is a theory that personal interest will create a thriving economy. In my case, my interest is to go to college. This will create teaching and administrative positions in a small town and as the college grows because of the local interests it will begin to draw people from outside the area. This will inject local businesses with revenue and

If you're anything like me you will find that last statement very confusing so i want to illustrate it using pizza. Is this scenario I`m the consumer and I`m going to eat one slice of pizza. Now this is the first slice of a deep dish pepperoni and bacon pizza and i'm hungry so my desire is very high, lets rate it as a 10. After eating it i`m very satisfied and i would rate my satisfaction level at a 10. Now because I'm a bigger guy lets say I eat another piece and after the second piece my satisfaction level is still 10. Now the Law of Diminishing Marginal Utility start to take effect when I reach in for the third piece, I'm starting to feel full but I just can't stop myself so I eat it. My stomach is starting to feel over full after it and i didn`t like it as much so my satisfaction is now at an 8. For science sake let's say I keep going and eat a 4th piece but Im totally full. So my satisfaction level is even less, something like 5. As you can see by my satisfaction level my desire to eat more is diminishing. Now with this diminishing desire the price I'm willing to pay is going down. I would be willing to spend $10 each for the first two slices but the third one might be more like $8 and the last one