Chapter 2

Cookies or Ice Cream?  Exploring Consumer Choices


Economics is all about how groups and individuals make choices and why they choose the things that they do.

Limited resources, or scarcity, is at the heart not only of economics but also of ecology and biology.


Describing Human Behavior

If you can understand the choices people made in the past, you stand a darn good chance of understanding the choices they will make in the future.

Major shifts in the economics environment are typically the result of millions of small individual decisions that add up to a major trend.

Economics assumes people are rational (but we know they are not).  The model looks at:

1.  Evaluate how happy each option can make you.

2.  Look at the constraints and tradeoffs limiting your options.

3.  Choose the option that will make maximize your overall happiness

The above being said people wonder if this is always true


Pursuing Personal Happiness

What motives people?

Economicists believe it is happiness


Using utility to measure happiness

Utility is the thing!

Economist believe humans are able to sort out and compare the utilities of various possible activities

Taking “selfless” actions into account

The issue of altruism.  Why help others with no return?

Economics is concerned with how people achieve their goals rather than with questioning the morality of those goals.


Noting how self-interest can promote the common good

Adam Smith, way back in the late 1700’s, believe that people chasing after their individual happiness would provide for other’s happiness as well

This is where the idea of the invisible hand comes from


You can’t have everything: Examining Limitations

How do we choose among the options


Resource Constraints

Limited natural resources

Who gets them and why?


Technology Constraints

Technology can limit choice for some


Time Constraints

Now what?


Opportunity Costs: The unavoidable cost

Opportunity cost of anything is the value of the best alternative thing you could have done instead

The opportunity cost of doing A is not doing B

This is where it is best to consider only two things

You should go with option X (rather than the best alternative option) only if the pleasure (utility) you will receive from option X exceeds the opportunity cost of not getting to enjoy the best alternative option


Making your choice: Deciding what and how much you want

Cost benefit analysis is primarily an all or nothing model.

Marginal utility looks at not only if you will do it or not but also how much

Diminishing marginal utility is where each additional, or marginal, unit brings less utility than the previous unit

In other words, what we want is always a balancing act


Exploring Violations and Limitations

Are people really informed?


Understanding uninformed decision making

Reality is that sometimes utility of something may be simply unknown

So economists say that when faced with uninformed decisions, people make their best guesses about not only uncertain outcomes but also about how much they will like or dislike things.


Make sense of irrationality

Even when we are fully informed we might not choose wisely

Sunk Costs are sunk!

A sunk cost is a cost that has already been incurred and cannot be recovered.

Mistaking a big percentage for a big dollar amount

$10 is $10!

Confusing marginal and average

Average is not the same as marginal!