1. Apply the "art of economic analysis" to your decision to attend college. What roles did rational self-interest, marginal analysis, and time and information play in the decision-making process?
ANS: A key economic assumption is that individuals, in making choices, rationally select alternatives they perceive to be in their best interests. By rational, economists mean simply that people try to make the best choices they can, given the available information. People may not know with certainty which alternative will turn out to be the best. They simply select the alternatives they expect will yield the most satisfaction and happiness. In general, rational self-interest means that individuals try to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit . Rational self-interest should not be viewed as blind materialism, pure selfishness, or greed. We all know people who are tuned to radio station WIIFM (What’s In It For Me?). For most of us, however, self-interest often includes the welfare of our family, our friends, and perhaps the poor of the world. Even so, our concern for others is influenced by the cost of that concern. We may readily volunteer to drive a friend to the airport on Saturday afternoon but are less likely to offer a ride if the plane leaves at 6:00 a.m. When we donate clothes to an organization such as Goodwill Industries, they are more likely to be old and worn than brand new. People tend to give more to charities when their contributions are tax deductible. TV stations are more likely to donate airtime for public-service announcements during the dead of night than during prime time (in fact, 80 percent of such announcements air between 11:00 p.m. and 7:00 a.m.1). In Asia some people burn money to soothe the passage of a departed loved one. But they burn fake money, not real money. The notion of self-interest does not rule out concern for others; it simply means that concern for others is influenced by the same economic forces that affect other economic choices. The lower the personal cost of helping others, the more help we offer. Choice Requires Time and Information
Rational choice takes time and requires information, but time and information are scarce and therefore valuable. If you have any doubts about the time and information required to make choices, talk to someone who recently purchased a home, a car, or a personal computer. Talk to a corporate official trying to decide whether to introduce a new product, sell online, build a new factory, or buy another firm. Or think back to your own experience of choosing a college. You probably talked to friends, relatives, teachers, and guidance counselors. You likely used school catalogs, college guides, and Web sites. You may have visited some campuses to see the admissions staff and anyone else willing to talk. The decision took time and money, and it probably involved aggravation and anxiety. Because information is costly to acquire, we are often willing to pay others to gather and digest it for us. College guidebooks, stock analysts, travel agents, real estate brokers, career counselors, restaurant critics, movie reviewers, specialized Web sites, and Consumer Reports.
Economic Decision Makers
There are four types of decision makers in the economy: households, firms, governments, and the rest of the world. Their interaction determines how an economy’s resources are allocated. Households play the starring role. As consumers, households demand the goods and services produced. As resource owners, households supply labor, capital, natural resources, and entrepreneurial ability to firms, governments, and the rest of the world. Firms, governments, and the rest of the world demand the resources that households supply and then use these resources to supply the goods and services that households demand. The rest of the world includes foreign households, firms, and…