STR 401 Lecture Guide
Economist’s Model of Behavior
Economic Theory of Choice Basic Assumptions
1. Self interest-
2. Unlimited wants and limited resources-
3. Constrained maximization-
a. People will also try to minimize constraints
4. Creativity- indv max. their personal satisfaction given resource constraints
Marginal Analysis and Benefits- more than dollars and cents
1. When to use it: in your own life and to change behavior
2. Sunken cost- costs and benefits that have already occurred
a. Irrelevant to economic decision making
b. Use opportunity cost rather than historic cost
*Sunk cost fallacy: tendency to throw good money after bad
3. Opportunity cost: The value of the best alternate use
4. Indifference curves: preferences (all combinations of goods that yield the same utility.) Most people balance combinations/utility is max @ the pt of tangency btween the constraint and an indifference curve
5. If benefits are greater than the costs= DO IT
6. Explicit cost: opportunity cost that involves direct monetary payment
7. Implicit cost: opportunity cost that does not involve monetary payment (time)
8. Economic profit: takes into account implicit and explicit costs
Accounting profit: only takes explicit cost into account
9. Risk premium: ppl will pick the option with the most certainty.
Different Models
-Happy-is-Productive: satisfied employees provide better service
-Economic: highly compensated/paid employees provide better service
-Good citizens: no need for incentive pay b/c ppl are intrinsically interested in a doing a good job; employees place employers’ interest before their own
-Product of the environment: upbringing determines behavior
*Economic model is best predictor of human behavior.
Exchange
Key features of open market economies:
1. Private property rights: