Economists’ View of

Behavior

Presented By:
Sonali Dhimmar
 ECONOMY
Basic Economic Problem
• People have unlimited wants
• Resources are limited

• Choices must be made on how to allocate these scarce

resources among the unlimited wants
 Marginal Analysis
BENEFITS > COST
how many drinks will you buy if the cost is $7?

• For the 1st Drink: MB = $20 > MC = $ 7, you should buy the drink.
• For the 2nd Drink: MB = $12 > MC = $ 7, you should buy the drink.
• For the 3rd Drink: MB = $6 < MC = $ 7, you should not buy the
drink.
 Opportunity Costs
• The opportunity cost of any alternative is defined as the
cost of not selecting the "next-best" alternative.

First Choice : Pear

Second Choice : Banana
Third Choice : Apple
Fourth Choice : Mango
Fifth Choice : Kiwi
Sixth Choice : Orange
 utility function
Utility = F (Food, Clothing)

• This function expresses the relation between total utility

and the level of goods consumed. The individual’s
objective is to maximize this function, given the resource
constraints.
• This can be shown graphically with indifference curves
and budget constraint
 Indifference Curves
Show all combination of goods that yield the same utility.

Mr. X is better off with 20 units of both

food and clothing. Here, his utility is
20.
Budget Constraint

This can be rearranged as

The constraint reflects the feasible

combinations of food and clothing that
are attainable given the person’s
income (I). The vertical and horizontal
intercepts, respectively, show the
amounts of food and clothing that can
be purchased if no income is spent on
the other good.
Income Changes Price Changes
 Individual Choice
• Individual’s goal is to maximize utility given his opportunities.

Optimal Choice
This optimal combination of food and
clothing, F* and C*, yields higher level
of satisfaction (utility) than other
feasible alternatives (e.g., points b and
c). slope of the indifference curve
represents Mr.X willingness to trade
food for clothing, whereas the slope of
the constraint represents the terms of
trade available in the marketplace. At the
optimal choice, the willingness and
ability to trade are equal.
Optimal Choice and Price
Changes

This figure shows how the optimal choice

changes with an increase in the price of
food. In this example, the individual
chooses less food (F1* rather than F0*).
This is the typical case—usually; an
individual will purchase less of a good
when its price increases. Due to the
particular utility function used in this
example, the amount of clothing
purchased remains unchanged (C*).
 Alternative Models of
Behavior
• Only-Money-Matters
• Happy-is-productive
• Good citizen
• Product of the environment
 Only-Money-Matters

• Important component of the job is the level of monetary

compensation.
• But people have an incredibly broad range of interests,
extending substantially beyond money.
• As examples, much of the work through the Red Cross is
undertaken by unpaid volunteers.
 happy-is-productive
• Managers sometimes assert that happy employees are
more productive than unhappy employees.
• The happy-is-productive model suggests that the
employee will be more productive, because the high
salary and job security are likely to increase job
satisfaction.
• The economic model suggests that the employee would
exert less effort—since the employee receives no
additional rewards for working harder and will not be
fired for exerting low effort.
 Good Citizen
• The basic assumption is that employees have a strong personal
desire to do a good job; they take pride in their work and want
to excel.
• Managers have three primary roles:
o First, they need to communicate the goals and objectives of the
organization to employees.
o Second, they must help employees discover how to achieve
these goals and objectives.
o Finally, managers should provide feedback on performance so
that employees can continue to improve their efforts.
 Product of the
environment
• The product-of-the-environment model argues that the
behaviours of individuals are largely determined by their
upbringings.
• Some cultures and households encourage positive values
in individuals, such as integrity, whereas others promote
negative traits, such as laziness and dishonesty.
Thank You