---------Chapter 1: The Why and Who of Economics---------
De nition of Economics.
Economics is the study of how individuals, businesses and institutions make choices, to optimize their levels of
satisfaction under conditions of scarcity.
Scarce economic resources mean limited goods and services. Scarcity RESTRICTS options
and demand choices. Because we ‘can’t have it all’ we must make rational decisions.
The Economic Perspective.
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal
benefits and marginal costs associated with their actions.
Economic Resources.
The land, labour, capital and entrepreneurial ability that are used in the production of goods and services;
productive agents; factors of production.
Opportunity Cost.
The opportunity cost of an activity is the value of the next best alternative that is forfeited to undertake the
activity.
Definition from the Glossary: The amount of other products that must be forgone or sacrificed to purchase a
unit of a product.
Key Explanation
Scarcity: We live in a world where resources are limited, but our wants and needs are unlimited. This means
we must make choices.
Trade-offs: Because we can’t have everything, we must choose between options. Opportunity cost helps us
measure what we lose when we choose one option over another.
Not Always About Money: Opportunity cost isn’t just about financial costs; it can also include time,
convenience, and even personal satisfaction.
Examples of Opportunity Cost: Studying vs. Going to the Gym
You have two hours free in the evening. You can either:
Study for your EKN 110 test
Go to the gym to train
If you choose to study, your opportunity cost is the fitness improvement and enjoyment you would have gained
at the gym.
If you choose to go to the gym, your opportunity cost is the better test score you might have achieved by
studying.
NOTE: OPPORTUNITY COST APPLIES TO INDIVIDUALS, BUSINESSES, AND GOVERNMENTS.
Rational Behaviour.
Rational behavior refers to decision-making that is logical and aimed at maximizing satisfaction (utility) given
limited resources. When people act rationally, they make choices that give them the best possible outcome based
on their preferences, needs, and budget.
In economics, we assume that individuals and businesses make decisions rationally TO GET THE BEST POSSIBLE
RESULTS FROM THEIR AVAILABLE RESOURCES.
Utility: The pleasure, happiness or satisfaction obtained from consuming a good or service.
Total Utility: The total amount of satisfaction gained from consuming a certain quantity of a good.
, Rational behavior involves comparing COSTS and BENEFITS before making a decision:
✔ Benefit (Utility): How much satisfaction a person will gain from an option.
✔ Cost: What the person must give up (money, time, or alternative choices).
✔ Rational choice: The option that gives the most benefit at the lowest cost.
As they weigh costs and bene ts, their economic decisions are:
(1) RATIONAL
(2) PURPOSEFUL
Rational Self-Interest – Acting to Maximize Satisfaction
People make choices based on what benefits them the most, which is designed to enhance personal satisfaction.
THIS DOES NOT MEAN PEOPLE ARE SELFISH—sometimes helping others also increases utility (e.g., donating to
charity because it makes you feel good).
Businesses also act in rational self-interest by trying to maximize profits.
The Rational Consumer – Steps in Buying Goods
A rational consumer follows a structured approach to making purchases:
The consumer is aware of what they want to satisfy (e.g., hunger, comfort, entertainment).
The consumer looks for goods that provide the best total utility for their needs (e.g., comparing
different brands of sneakers).
Consumers know they have a limited budget and must choose how much of each product they can
afford.
The Three Elements of Rational Consumer Behavior
(1) Calculation – Comparing Costs and Benefits
The consumer evaluates which option provides the most satisfaction (utility) for the price.
Example: Comparing different data bundles to get the best value for mobile internet.
(2) Negotiation – Finding the Best Deals
Consumers try to maximize their benefits by looking for discounts, promotions, or bargaining.
Example: Buying a laptop on Black Friday because of lower prices.
(3) Expenditure – Spending Money Efficiently
After choosing the best option, the consumer spends money according to their budget constraint.
Example: Deciding to buy groceries first before spending money on entertainment.
De nition of Economics.
Economics is the study of how individuals, businesses and institutions make choices, to optimize their levels of
satisfaction under conditions of scarcity.
Scarce economic resources mean limited goods and services. Scarcity RESTRICTS options
and demand choices. Because we ‘can’t have it all’ we must make rational decisions.
The Economic Perspective.
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal
benefits and marginal costs associated with their actions.
Economic Resources.
The land, labour, capital and entrepreneurial ability that are used in the production of goods and services;
productive agents; factors of production.
Opportunity Cost.
The opportunity cost of an activity is the value of the next best alternative that is forfeited to undertake the
activity.
Definition from the Glossary: The amount of other products that must be forgone or sacrificed to purchase a
unit of a product.
Key Explanation
Scarcity: We live in a world where resources are limited, but our wants and needs are unlimited. This means
we must make choices.
Trade-offs: Because we can’t have everything, we must choose between options. Opportunity cost helps us
measure what we lose when we choose one option over another.
Not Always About Money: Opportunity cost isn’t just about financial costs; it can also include time,
convenience, and even personal satisfaction.
Examples of Opportunity Cost: Studying vs. Going to the Gym
You have two hours free in the evening. You can either:
Study for your EKN 110 test
Go to the gym to train
If you choose to study, your opportunity cost is the fitness improvement and enjoyment you would have gained
at the gym.
If you choose to go to the gym, your opportunity cost is the better test score you might have achieved by
studying.
NOTE: OPPORTUNITY COST APPLIES TO INDIVIDUALS, BUSINESSES, AND GOVERNMENTS.
Rational Behaviour.
Rational behavior refers to decision-making that is logical and aimed at maximizing satisfaction (utility) given
limited resources. When people act rationally, they make choices that give them the best possible outcome based
on their preferences, needs, and budget.
In economics, we assume that individuals and businesses make decisions rationally TO GET THE BEST POSSIBLE
RESULTS FROM THEIR AVAILABLE RESOURCES.
Utility: The pleasure, happiness or satisfaction obtained from consuming a good or service.
Total Utility: The total amount of satisfaction gained from consuming a certain quantity of a good.
, Rational behavior involves comparing COSTS and BENEFITS before making a decision:
✔ Benefit (Utility): How much satisfaction a person will gain from an option.
✔ Cost: What the person must give up (money, time, or alternative choices).
✔ Rational choice: The option that gives the most benefit at the lowest cost.
As they weigh costs and bene ts, their economic decisions are:
(1) RATIONAL
(2) PURPOSEFUL
Rational Self-Interest – Acting to Maximize Satisfaction
People make choices based on what benefits them the most, which is designed to enhance personal satisfaction.
THIS DOES NOT MEAN PEOPLE ARE SELFISH—sometimes helping others also increases utility (e.g., donating to
charity because it makes you feel good).
Businesses also act in rational self-interest by trying to maximize profits.
The Rational Consumer – Steps in Buying Goods
A rational consumer follows a structured approach to making purchases:
The consumer is aware of what they want to satisfy (e.g., hunger, comfort, entertainment).
The consumer looks for goods that provide the best total utility for their needs (e.g., comparing
different brands of sneakers).
Consumers know they have a limited budget and must choose how much of each product they can
afford.
The Three Elements of Rational Consumer Behavior
(1) Calculation – Comparing Costs and Benefits
The consumer evaluates which option provides the most satisfaction (utility) for the price.
Example: Comparing different data bundles to get the best value for mobile internet.
(2) Negotiation – Finding the Best Deals
Consumers try to maximize their benefits by looking for discounts, promotions, or bargaining.
Example: Buying a laptop on Black Friday because of lower prices.
(3) Expenditure – Spending Money Efficiently
After choosing the best option, the consumer spends money according to their budget constraint.
Example: Deciding to buy groceries first before spending money on entertainment.
