BEHAVIOR OF AN ECONOMIC MAN
An economic man is an economic model that is used to measure conditions and achieve theories of how a person behaves to make decisions.
It is considered that this model always seeks to maximize its gains based on the data or information he has and always in a rational way. As this is a model , no other factor (physical or emotional) would affect him and he would make decisions seeking maximum personal benefit or self-interest.
Self-interest is the position that companies or individuals have to seek maximum profit or gain. The market uses this desire to self-benefiting to offer new services and products and to cause the voluntary exchange of goods and services . the value of these services is determined by market
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He bases his choices on the amount of money he has available and if he decided to buy one product the chances he would have to buy another. If some products have the same price, the consumer will choose the one with the most benefit. And if some products give the same benefit to the consumer, the consumer will choose the cheapest one.
This choices or decisions tend to be at the margin . For instance, he is always wondering if he should buy one more unit of the product and what will be its usefulness when buying it and if he buys one more how it will affect its final price.
Marginal utility is low if the article is available in abundance; therefore, the utility of an item that is reduced in quantity is greater. The price of a product is limited by marginal utility. For example, vegetables or fruits during a good season are reasonably priced but if there are floods or droughts that damage crops, the products come at exorbitant prices.
Marginal Cost is the value that a company is disposed to invest in order to produce one more unit of a good.
Marginal benefit refers to what people are willing to sacrifice in order to obtain one more unit of a
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That is why it is necessary to develop a theory of the optimal or rational accumulation of expensive information, a theory that contemplates the idea of investing more when it comes to obtaining a "greater" decision. For example, we probably need more information if we have to decide whether or not we marry or with whom, whether we have to decide whether or not we buy a home. The Human Capital theory does not assume, of course, that decision-makers are necessarily aware of the effort to maximize, nor does it assume that agents can verbalize or accurately describe their reasons for acting in a determinate manner. It only assumes that the economic approach is comprehensive and applicable to all human behavior, whether that conduct refers to market prices, Perhaps one of the most representative examples of the Theory of Human Capital is found in Becker 's account of marriage and divorce. According to this approach, a person decides to marry when the expected utility of marriage exceeds The utility of staying single or the utility of looking for a better partner. Thus, a married person ends his marriage when the anticipated utility of returning to unmarriedness, or marrying another person, exceeds the loss of usefulness of the separation, including losses that occur for such matters as the physical separation of the children , For the payment of legal fees, etc. Since many
The Rational Choice perspective is a theory that the choices individuals make are done in a logical manner were they weigh the benefits against the cost that could possible result. In other words, the self-interest should receive the maximum reward while the penalties would be minimum to none.
The Rational expectations model was developed by Robert Lucas,rational economic agents are assumed to make the best of all possible use of all publicly available information. Before reaching a conclusion, people are assumed to consider all available information before them, then make informed, rational judgments on what the future holds. This does not mean that every individual’s expectations or predictions about the future will be correct. Those errors that do occur will be randomly distributed, such that the expectations of large numbers of people will average out to be correct.
Utilitarianism was first brought up along the nourishing of “The Greatest Happiness Principle” introduced by Jeremy Bentham and further developed by John Stuart Mill, who was a follower of Bentham (Sweet, 2013). Based upon its principle, Utilitarianism states that to be good is to generate the greatest possible amount of happiness for the greatest number. In contrast with rational egoism, Utilitarianism focuses more on maximizing the overall net happiness of the majority. When facing a decision to make, utilitarianism provide us the evaluations of actions taken based upon their consequences (Sweet, 2013). By weighing the consequence, the model often produces more practical results.
According to Thaler and Sunstein, people do not always make rational choices and those choices would present themselves quite differently if they had unlimited and cognitive abilities and unlimited will power. The two argue against the notion of the perfectly rational individual that exists in economics textbooks (Nudge 6-7). They reject that individuals most of the time make terrific choices, and if not terrific certainly better than any third party could do (Nudge 7). Real people suffer from a variety of cognitive biases and errors. People have trouble with long division when they don’t have a calculator and often forget their spouse’s birthday (Nudge 6). To be blunt, individuals are bad at calculating risk and are mentally lazy.
“Marginal analysis involves changing the value(s) of the choice variable(s) by a small amount to see if the objective function can be further increased (in the case of maximization problems) or further decreased (in the case of minimization problems)” (Thomas & Maurice, 2012, pp. 91). Marginal analysis is known as “the central organizing principle of economic theory” for its importance and applicability to many aspects of our daily lives as well as our careers (Thomas & Maurice, 2012, pp. 94). The key concepts of marginal analysis include total benefit, total cost, marginal benefit, marginal cost and net benefit. These concepts all come together to play a significant role in the use of marginal analysis to reach the optimal desired outcome.
Private enterprise is the ironclad foundation of the United States of America. Whenever this right is jeopardized, the stability of the country follows in a symmetric trend. However, the value of this system has not always been clear. Throughout time no country has embraced this system quite like the United States. Private enterprise entails the right to market and sell a product or service, as well as the right of purchase. Indeed the consumer, in his participation, is a private enterpriser (Lubell). The open markets, private initiative, competition, and private ownership defining private enterprise make it the healthiest economic system.
The theory of Nash equilibrium by John Nash (1951) has been a central concept in game theories and further more for a wide range from economics even to the social and environmental sciences studies. Besides the game theory, David (2012) has recalled that, there are three unrealistic traits of standard economic model of human behavior – “unbounded rationality, unbounded willpower, and unbounded selfishness – all of which behavioral economics modifies.” However, consider the assumption of Nash equilibrium theory, there is a hypothesis about all players in the game they are rational and understand the rule of the game. Which means they do know about their opponents choices and what reaction they are going to choose with the goal of profit maximization (or their own objectively goal). In the following there will be a further discussion and line out the practicality of Nash equilibrium.
In everyday real life situations, one keeps on making various decisions depending on a number of factors. Thus, decision-making is an integral tool in human life, and one cannot avoid it. In view of this, experts report that individuals make use of varying decision-making models to arrive at a decision that suits them. Here, the writer presents four decision-making models, namely the classical, behavioral, satisficing, and optimizing models.
An 'economic cost-benefit analysis' approach to reasoning sees actions favoured and chosen if the benefit outweighs the cost. Here, the benefits and costs are in the form of economic benefits and costs, such as, monetary loss or profit. One who is motivated by such an approach will deem a course of action preferable if doing so results in an economic profit. Conversely, actions will be avoided if they result in an economic loss (Kelman 1981).
Customers with budget constraint may not view too many choices as favorable as they choose products base on lowest price.
According to Aumann (2000), “The nash equilibrium and most of its variants express the idea that each player individually maximizes his utility…” (p. 23). While making a decision, players are thought to consider what other player(s) will most likely do, each one if multiple, in order to predict how to get the best outcome. Players attempting to attain the best payoff have been explained in game theory by common knowledge and rationality assumptions in order to understand the other players. Common knowledge is the general information about the specifications of the game and knowing that each player knows it, that each player knows each other knows it and so on (Colman, 2016). Rationality means players are always making decisions to obtain the highest payoff based on their knowledge, which is also considered common knowledge (Colman, 2016). Together, these are fundamental components to game theory and help us understand the underlying structure to decision-making in
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
Economists examine the basics of the economy, inclusive of mitigating factors such as income, unemployment, and average costs, to determine if an economy is efficient. An efficient economy is one in which society reaps the greatest reward from its resources (Mankiw, 2015). According to Gregory Mankiw, economists study how to make decisions, how people interact and how the economy works as a whole. Microeconomics is the branch of economics that analyzes the market behavior of individual consumers and firms to attempt to understand the decision-making process of firms and
In our normal day to day lives, we as a both consumers and people, make a great deal of decisions. Some decisions come naturally to us, like, “should I turn off the TV before I leave the house?” or “should I stop at the red light?” However, other decisions require a little more thought process behind them. Understanding how people and/or consumers reach their decisions/choices is an area that has received a lot of attention. Theories have been generated to explain how people make decisions, and what types of factors influence decision making in the present and future.
An economic system can be defined as a country or nation in an organized manner production and consumption of goods and services, including the combination of the various institutions, agencies, consumers, including a specific economic structure of society, or community (loman.J. & Garratt.D., 2013). The basic economic system including three types are free market economy, planned market economy and mixed market economy. The article will explain that through there different economy to analyses the different country how to solve the basic economic problem.