Chapter 2

 Class Notes

 Individual Choice

In a market economy, people are motivated to do well. Our economy has thrived because of our own self-interests.

The economist Adam Smith created the “invisible hand theory.” People will act in their own self-interests. People will make purchases and business decision according to their own benefit. Smith surmised that everyone in society acting in his or her own self-interest will collectively benefit the society as a whole. Thus an inefficient business or product deserves to die.

However, is this true? Does every enterprise that is not making a profit deserve to die? Government will step in and rescue certain industries based on a social decision. Recently the airline industry after the September 11 attacks suffered from the loss of travelers. The government made a social decision to rescue the industry with aid.

Psychic income is the nonmonetary reward we get from some action or decision we make.

5 Step Decision Making Process

1. Define the Problem. Try to detach your emotions from the decision.
2. List the alternatives.
3. Come up with criteria on which to evaluate the alternatives.
4. Evaluate the alternatives based on your criteria
5. Choose the alternative that best meets the criteria

Utility is the satisfaction you get from a good or a service. Util  is the unit of measurement for utility.