Chapter 2

Making Individual Decisions

 

Section 1

In a Market Economy the economic questions of:

1.            What to produce

2.            How to produce and

3.            For whom to produce

 

are answered by …….

 

Individuals must consider the costs and the benefits of each choice before making a decision.

 

In a Market Economy or Capitalist economy the economic questions are decided by individuals in the marketplace.

 

People’s actions in a market economy result from their motives for personal gain. 

 

Economic Incentives – the increase in personal satisfaction that may result from some economic activity.

Psychic Income – is the non-monetary reward we get from taking some action. (volunteering at a hospital)

 

¨      How do products enter the market?

¨      Why do some stay for years while others fail in weeks?

¨      Who decides what should be produced?

¨      Who decides how products should be produced?

¨      Efficiency

¨      Decrease Costs while maximizing profits

¨      Example on page 32 (labor vs. capital intensive means)

¨      For whom are these products produced?

 

The United States has achieved a high standard of living over the past 50 years.  Why has this phenomenon taken place?

 

 

 

What is self – interest?

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¨      What is the incentive for producers to produce cheap resources in the manufacture of goods?

¨      What is every consumers’ incentive in the marketplace?

 

Economic profit – the difference between the money that you obtain from selling a product and the cost of producing the product.

 

Self Interest is the driving force behind market economies!

In the Chips Activity

 

The Invisible Hand (Adam Smith) – the incentive that guides individuals to choose in the best interest of society by pursuing their own self interests.

 

Individual Incentives and Social Choice

If the government makes the economic decisions rather than individuals, then equality not self interest is the incentive.  Generally, social decisions are not as effective as individual decisions.

 

Why?

 

Section Two

Individual Decision Making Model – a logical, well-reasoned approach to individual personal problem solving involves five steps:

 

1.           Define the problem

A.               Be objective (avoid strong emotions)

B.               Focus on the Issue

2.           List the alternatives (possible course of action)

A.               Limit your alternatives (reasonable)

B.               Be realistic

3.           List the criteria to evaluate the alternatives

A.               Criteria – the characteristics that you will use to judge a group of alternatives.

B.               Rank the criteria in order of importance

4.           Evaluate the alternatives based on criteria

A.              Decision Matrix (see page 39)

B.               Assign points to each alternative

5.            Choose the alternative that best suits your needs.

 

Decision Making Process  (an example)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Section 3

Maximizing Utility

Utility – is the satisfaction one receives from the consumption, use, or ownership of a good or service. 

 

Good choices are those that maximize utility.

 

Decision Matrix

Real Life Situation

 

Scenario:  You have been hired for a part-time job at a store at the edge of town.  You know the bus does not go that far, and it is too far to walk.  You currently do not have a vehicle.

 

Alternatives

Total Points