DECISION MAKING AND

RATIONALITY
 DECISION MAKING AND RATIONALITY

Economics uses the concept of rationality to predict the

actions or behavior of people. Economists assume that
individuals make decisions rationally and that it is possible to
predict certain behavioral outcomes.

For example, if a person prefers rice over bread, and bread

over potato, then it is most likely that he or she prefers rice
over potato. Given this preference, when this person is
faced with a choice between buying suman and mashed
potato, he or she would choose to buy suman.
 Opportunity Cost and Trade-off

Opportunity Cost is one of the evident effects of scarcity.

When resources are scarce or limited, consumers are
compelled to choose how to manage them efficiently and
decide how much of their wants or needs will be satisfied and
how much of them will be left unsatisfied. Hence, when a
need is pursued, all other alternatives are forgone. And the
more we have of a certain good, the more we sacrifice other
things. An exchange where you give up one thing to get
something else that you also desire is called a trade-off.
 How to illustrate Opportunity Cost and Trade-Off?
One example is when you spend 50 pesos on your mobile load.
The opportunity cost of buying corresponds to all other items that
can be bought with the same amount. Let us say that with your
50 pesos you can buy other products such as a sandwich, a can
of fruit juice or a bottle of mineral water and a ballpen or pencil.
You can also buy a combination of other items whose prices total
50 pesos. However, once you have decided to buy a mobile load,
you have chosen to abandon all other options. Once the choice is
made, you can no longer go back and undo such decision. This is
called a Trade-Off. Trade-Offs could result in either the
satisfaction of needs or a failure to meet them.
 Analysis time!
It’s barely two weeks to go before the holiday season.
John was able to save ₱4,500 for the whole year by
keeping a portion each day from his allowance. It’s
Saturday and John decided to take a stroll to the mall
to buy some gifts for his family and friends. John has
made a list of what he would buy for his family and
friends. He planned to spend ₱ 2,250 of his money to
buy gifts and the other half of his money to buy a shirt
and a new pair of shoes to replace his old worn-out
shoes.
 Analysis time!
A. When John arrived at the mall, he passed by a fast-food restaurant and realize
that it has been several months since he last ate in that restaurant. John had a
delicious snack at home and still feels full, but he decided to order a
cheeseburger, fries, and drinks which he paid for 109 pesos. After having his
snack, John finally had the chance to choose the gifts for his family and friends. A
lot of the items displayed in the mall are on sale!
B. John started picking several gift items for his family and friends which cost
₱2,650. He saw a nice cap on sale which cost 175 pesos and decided to buy it as
a gift for himself.
C. John went to the counter and paid ₱ 2,825 for the items he had selected.
D. John went on to find a pair of shoes and some clothes for himself. The pair of
shoes he liked cost ₱ 1,199 and the shirt he liked cost ₱ 259 each. He wanted to
buy two shirts, but he realized he only had ₱ 1,566 left of his money.
E. John decided to buy the shoes he liked and buy only one shirt. He decided to
save again for him to buy the other shirt that he liked in the future.
1.In what part of the story do you think John had
experienced scarcity?
A. When John arrived at the mall, he passed by a fast-food restaurant and realize
that it has been several months since he last ate in that restaurant. John had a
delicious snack at home and still feels full, but he decided to order a
cheeseburger, fries, and drinks which he paid for 109 pesos. After having his
snack, John finally had the chance to choose the gifts for his family and friends. A
lot of the items displayed in the mall are on sale!
B. John started picking several gift items for his family and friends which cost
₱2,650. He saw a nice cap on sale which cost 175 pesos and decided to buy it as
a gift for himself.
C. John went to the counter and paid ₱ 2,825 for the items he had selected.
D. John went on to find a pair of shoes and some clothes for himself. The pair of
shoes he liked cost ₱ 1,199 and the shirt he liked cost ₱ 259 each. He wanted to
buy two shirts, but he realized he only had ₱ 1,566 left of his money.
E. John decided to buy the shoes he liked and buy only one shirt. He decided to
save again for him to buy the other shirt that he liked in the future.
2. In what part of the story did John experience opportunity
cost?
A. When John arrived at the mall, he passed by a fast-food restaurant and realize
that it has been several months since he last ate in that restaurant. John had a
delicious snack at home and still feels full, but he decided to order a
cheeseburger, fries, and drinks which he paid for 109 pesos. After having his
snack, John finally had the chance to choose the gifts for his family and friends. A
lot of the items displayed in the mall are on sale!
B. John started picking several gift items for his family and friends which cost
₱2,650. He saw a nice cap on sale which cost 175 pesos and decided to buy it as
a gift for himself.
C. John went to the counter and paid ₱ 2,825 for the items he had selected.
D. John went on to find a pair of shoes and some clothes for himself. The pair of
shoes he liked cost ₱ 1,199 and the shirt he liked cost ₱ 259 each. He wanted to
buy two shirts, but he realized he only had ₱ 1,566 left of his money.
E. John decided to buy the shoes he liked and buy only one shirt. He decided to
save again for him to buy the other shirt that he liked in the future.
3. In what part of the story did John had a trade-off?
A. When John arrived at the mall, he passed by a fast-food restaurant and realize
that it has been several months since he last ate in that restaurant. John had a
delicious snack at home and still feels full, but he decided to order a
cheeseburger, fries, and drinks which he paid for 109 pesos. After having his
snack, John finally had the chance to choose the gifts for his family and friends. A
lot of the items displayed in the mall are on sale!
B. John started picking several gift items for his family and friends which cost
₱2,650. He saw a nice cap on sale which cost 175 pesos and decided to buy it as
a gift for himself.
C. John went to the counter and paid ₱ 2,825 for the items he had selected.
D. John went on to find a pair of shoes and some clothes for himself. The pair of
shoes he liked cost ₱ 1,199 and the shirt he liked cost ₱ 259 each. He wanted to
buy two shirts, but he realized he only had ₱ 1,566 left of his money.
E. John decided to buy the shoes he liked and buy only one shirt. He decided to
save again for him to buy the other shirt that he liked in the future.
4. Which of the item/s John bought for himself is/are his
needs?
A. When John arrived at the mall, he passed by a fast-food restaurant and realize
that it has been several months since he last ate in that restaurant. John had a
delicious snack at home and still feels full, but he decided to order a
cheeseburger, fries, and drinks which he paid for 109 pesos. After having his
snack, John finally had the chance to choose the gifts for his family and friends. A
lot of the items displayed in the mall are on sale!
B. John started picking several gift items for his family and friends which cost
₱2,650. He saw a nice cap on sale which cost 175 pesos and decided to buy it as
a gift for himself.
C. John went to the counter and paid ₱ 2,825 for the items he had selected.
D. John went on to find a pair of shoes and some clothes for himself. The pair of
shoes he liked cost ₱ 1,199 and the shirt he liked cost ₱ 259 each. He wanted to
buy two shirts, but he realized he only had ₱ 1,566 left of his money.
E. John decided to buy the shoes he liked and buy only one shirt. He decided to
save again for him to buy the other shirt that he liked in the future.
5. If you were John, which of the items he bought would you
decide not to buy? Why?
A. When John arrived at the mall, he passed by a fast-food restaurant and realize
that it has been several months since he last ate in that restaurant. John had a
delicious snack at home and still feels full, but he decided to order a
cheeseburger, fries, and drinks which he paid for 109 pesos. After having his
snack, John finally had the chance to choose the gifts for his family and friends. A
lot of the items displayed in the mall are on sale!
B. John started picking several gift items for his family and friends which cost
₱2,650. He saw a nice cap on sale which cost 175 pesos and decided to buy it as
a gift for himself.
C. John went to the counter and paid ₱ 2,825 for the items he had selected.
D. John went on to find a pair of shoes and some clothes for himself. The pair of
shoes he liked cost ₱ 1,199 and the shirt he liked cost ₱ 259 each. He wanted to
buy two shirts, but he realized he only had ₱ 1,566 left of his money.
E. John decided to buy the shoes he liked and buy only one shirt. He decided to
save again for him to buy the other shirt that he liked in the future.