ECON HANDOUT #2: ECONOMIC DECISIONS BY CONSUMERS,

PRODUCERS AND GOVERNMENTS:

** always remember that every economy is comprised of three major groups that make economic
decisions for that country, they are:

(1) Consumers
(2) Producers
(3) Governments
Let us now deal with each group individually:

(1) Consumers refer to all individuals who consume goods and services to satisfy their wants
and needs, so technical consumers comprise of all of us individuals on the planet at the
moment as all of us consume goods and services to survive amongst other things. It
should be noted that consumers receive satisfaction when they consume these goods
and services.
*** it should be duly noted that in economics we refer to this satisfaction as “utility”. in
general, the main objective of consumers is to maximize the satisfaction they get from
consumption.

(2) Firms refer to all the producers within an economy, it should be noted that in Economics
the term producers and firms are used interchangeably as they mean the same thing..
Producers use resources to produce the goods and services for consumption by the
consumers. In order to utilize resources in production, firms must pay for them. In other
words, the owners of these resources be it either naturally occurring or man- made are
paid for their effort in the production process by the producers as they utilize these
resources. The main objective of firms involved in the production process is to make a
profit, not only to make the profit but to maximize it. Firms generate revenue from the
sale of the goods they produce and the services that they render. This revenue enables
the firm to cover the costs of the resources that they have paid for in order to make the
same goods or to provide the services themselves. As long as the revenue generated is
greater than the costs of production the firm earns a profit.
(3) Governments are also actively involved in making economic decisions to manage the
economy. The annual budget presented by any government typically gives a list of
activities and projects that the government plans to undertake in the coming year,
referred to as a “fiscal year”. In addition to this, governments also influence the
economic decisions of both consumers and firms, be it rather directly or indirectly as a
result of their actions, in particular the government may seek to prevent consumers
from consuming goods and services which are harmful or detrimental to their health.
Examples of this are laws which prohibit the consumption of illegal drugs, the
government may also seek to discourage the consumption of goods, such as alcohol and
tobacco products, by imposing high taxes that increases the price of these products.
Governments can also regulate the manner in which goods and services are to be
produced, such as health and safety standards, which require strict compliance by firms.
The aim is to prevent instances of a firm’s attempt to minimize costs resulting in faulty
or harmful products.
DECISION MAKING BY CONSUMERS:

In economics, consumers are described as “utility maximisers” the term utility is a

measure of the happiness or satisfaction or gratification earned from consuming goods
and services. Utility maximization means that consumers will attempt to consume goods
and services so as to maximize satisfaction. In order to achieve this objective, individuals
must choose what they want to consume.

Due to the multiple choices available, consumers need to make decisions all the time,
for example, when someone is faced with the decision to purchase a motor vehicle,
he/she may choose to purchase either a new or a used car, the individual may also have
preferences, such as luxury features or even sports utility features. Different choices
gives different levels of satisfaction. These different levels of satisfaction will correspond
to different $$ costs. The final decision shall ultimately be taken when the individual is
sure that the benefits or satisfaction he/she derives is worth the price he/she pays for
the choice taken. Another important factor taken into consideration when making
decisions about purchasing goods and services is the amount of money the consumer
can spare. The higher a person’s income the more money he/she can spend. This means
consumers also make decisions about what to purchase as based upon their income.

Typically, the greater the amount of goods and services that consumers can consume,
the greater will be the level of enjoyment or satisfaction that they receive. In Economics
this is referred to as an improvement in consumer welfare.

DECISION MAKING BY PRODUCERS:

Producers/firms are also faced with decision making challenges to achieve their
objectives.
** always remember that the primary objective of a producer is to maximize their profits
earned from the goods and services it sells. As such producers make decisions all the
time when comparing revenue and costs.

For example if a firm produces and sells bottled soft drink beverages, the producer may
take the decision to use plastic bottles instead of glass ones as this may be the cheaper
option available, and as such is able to increase his/her profits due to the lowered costs.
Similarly a producer may spend the extra money to advertise the products on television,
if they think that the increase in sales because of the advertising will cover the costs of
the advertising campaign, in such a case , the decision to launch the advertising must
help the firm to increase its profits.

GOVERNMENT INFLUENCES ON ECONOMIC DECISIONS BY

CONSUMERS AND PRODUCERS:
Governments are also actively involved in making economic decisions to manage the
economy. The annual budget presented by any government typically gives a list of
activities and projects that the government plans to undertake in the coming year,
referred to as a “fiscal year”. In addition to this, governments also influence the
economic decisions of both consumers and firms, be it rather directly or indirectly as a
result of their actions, in particular the government may seek to prevent consumers
from consuming goods and services which are harmful or detrimental to their health.
Examples of this are laws which prohibit the consumption of illegal drugs, the
government may also seek to discourage the consumption of goods, such as alcohol and
tobacco products, by imposing high taxes that increases the price of these products.
Governments can also regulate the manner in which goods and services are to be
produced, such as health and safety standards, which require strict compliance by firms.
The aim is to prevent instances of a firm’s attempt to minimize costs resulting in faulty
or harmful products.
Governments also play an economic role by providing various goods and services to the
citizens of the country, these include goods, such as public roads, street lighting and
bridges the government is in charge of constructing infrastructure and maintaining it. In
addition to these tangible products, the government is also in charge of providing
essential services such as health care, education, police services national defense and a
host of other services. The main reason that these goods and services are under the
government’s Perdue is to prevent private monopolies and citizen and consumer
victimization and disadvantage, as well as to ensure equitable citizen welfare

MARGINAL ANALYSIS:

Marginal Analysis is the analysis of situations where a decision has to be made by

changing a unit, typically these decisions are made in order to achieve some objective.

(i) In the case of the consumer who is considering whether to purchase one more
slice of pizza. The decision by the consumer would be made with the objective
of maximizing satisfaction or utility, if the consumer feels that the satisfaction
he/she would get from eating the additional slice is worth the price then he/she
would purchase the additional slice. The additional satisfaction is called
Marginal Utility (M.U.)
(ii) In the case of the firm, the objective is to maximize profit from the production
and sale of goods and services. If a factory owner is considering whether to
purchase an additional piece of equipment he/she would make the choice based
on whether the profit would be increased, the addition to or extra profit is
known as Marginal Profit(M.P.)
(iii) In the case of the government, the objective is the maximization of the welfare
of the citizens of the country for example if the government of T&T decides to
purchase on additional bus then this decision would be based on whether the
additional bus would improve the well-being of the people of T&T. factors such
as time saving involved in people commuting to and from work and the reduced
stress from being delayed in traffic for a long time would be considered. This is
called considering Marginal Welfare
Table 1:
Differing Groups and objectives of each within the economy:

GROUP MAIN OBJECTIVE

CONSUMERS Maximize satisfaction/utility
PRODUCERS Maximize profit
GOVERNMENT Maximize welfare of citizens.