A fundamental assumption for economic

A fundamental assumption for economic analysis

A fundamental assumption for economic analysis is that economic agents, be it an individual, a household or a firm/business, tend to make choices and select alternatives rationally. The rational economic choice (decision) implies that people are driven by the rational pursuit of self-interest, and engaged in economic decisions to maximize this self-interest.

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By rational economic choice, economists mean that people try to make the best choice they can, given the available resources at their disposals (money, time, etc.) and information.

Self-interest is when individuals make economic decisions that are in their own best interest. On the other hand, social interests when choices are made that benefit society as a whole. Economists argue that social interest can be attained by individual decision makers acting in their own self-interest. This process is what Adam Smith called the invisible hand, which has been the foundation of the market economy.

Create an example to demonstrate how an individual or firm acting out of self-interest to maximize profits by offering goods or services in economic markets benefit consumers – even if they do not care about them. In other words, how does self-interest help achieve society’s economic goals?

What is the relationship between self-interest and social interest in the economic decision (economic choice) process? Is there a conflict between the two in the economic world?

Discussion Question 2 of 3

There are two major kinds of government interventions in markets: price controls and quantity controls. The government intervenes to regulate prices by imposing price controls, which are legal restrictions on how high or low a market price may go. Price ceiling is the maximum price sellers are allowed to charge for a good or service whereas price floor is the minimum price buyers are required to pay for a good or service.

Price and quantity controls may have adverse impacts on productive and allocative (marketing) efficiency. However, price and quantity controls are used despite their well-known problems.

Based on the reading in Chapter 3 on price ceiling and price floor, explain the impacts of the following price control measures.

What would happen to the supply and demand of Super Bowl tickets if the government mandated that no more than $20 a ticket could be charged?

What would happen if a law passed dictating that kindergarten teachers could make no less than $100,000 per year?