Economics and Decision Making.

How do individuals and businesses in society make decisions? From the viewpoint of an economist there are three basic assumptions. Rationality, maximization and costs & benefit analysis.

Rationality: Economists start by assuming that economic decision makers act in a rational manner. What this means is that decision makers act according to reason, rather than in any odd way. For instance, if a person wanted to increase his or her income, it is assumed that he or she would try to work longer hours, rather than shorter hours. Equally if there were two identical products of washing detergent on the supermarket shelf, one price at $5.00, the other on sale at $3.00, it is assumed the shopper would buy the cheaper packet.

Maximization: A second economic assumption is that economic decision-makers attempt to maximize. This means that they try to get the best out of any economic situation. If a person chooses to work for 38 hours a week instead of 40 hours, everything else being the same including the wage, then he or she will choose to maximize leisure time by working 38 hours. Equally, a business will prefer to earn as much profit as possible, rather than a lower profit as possible.

Costs and benefits: In order to decide what is biggest in any economic situation, a decision-maker has to asses the costs and benefits of any particular course of action. For example what would be the costs and benefits of a decision by workers to buy a factory that they worked for if it was about to close down? The costs would be the money they had to put up to buy the factory from its owners. However, costs could be even greater. If the factory started to make a loss, they could not only loose all their money they had put in the firm but may have to commit more money to keep it going. Another cost would be the lost opportunity to find a new job. The benefits would be that they would still be in a job. They would get a salary. What’s more if the company were successful, they

These costs and benefits relate to the individual workers who are making the decision about weather to buy the factory. The economic model of decision maker than assumes these workers would decide to support buying or not buying by weighing up these costs and benefits and making a rationale decision about how to maximize their individual utility. This is the basis of an economic decision making model.