What this lesson teaches
I can explain scarcity, choice and opportunity cost from the view of a consumer, a producer and a government.
Syllabus 8843, 1.1.1(d). Scarcity, choice and resource allocation: The concepts of scarcity, choice and opportunity cost can be explained from the perspectives of different economic agents (consumers, producers and governments)
I can state what consumers, producers and governments each aim to maximise: satisfaction, profit and social welfare.
Syllabus 8843, 1.1.2(a). Decision-Making Process of Economic Agents: Objectives of rational economic agents: consumers aim to maximise utility (satisfaction), producers aim to maximise profits and governments aim to maximise social welfare
Make a guess
A bakery could sell 200 more loaves a week by staying open late. Would a profit-maximising owner always do it?
- Not always. Only if the extra revenue beats the extra cost.
- Yes. More sales always means more profit.
- No. A good owner puts customers first and ignores profit.
Show the answer
Not always. Only if the extra revenue beats the extra cost.
Profit is revenue minus cost. Late hours mean paying staff and electricity, and if those cost more than the extra sales bring in, profit falls.
Consumers maximise satisfaction, producers maximise profit and governments maximise social welfare.
Economists assume each type of decision maker, called an economic agent, has an aim.
Consumers aim to maximise utility, meaning satisfaction, within their budget.
Producers aim to maximise profit: total revenue minus total cost. Selling more does not always mean more profit if costs rise faster.
Governments aim to maximise social welfare: the well-being of society as a whole. They must balance efficiency, equity and other goals, and different groups often want different things.
- Consumers
- Maximise utility.
- Producers
- Maximise profit.
- Government
- Maximise social welfare.
Worked example: A cafe opens an extra hour
A cafe considers opening one extra hour in the evening. The extra hour would bring in $300 a week in revenue but cost $360.
- Consumers who work late gain another place to eat, so their utility rises.
- The owner's profit falls by $60 a week, so a profit-maximising owner would say no.
- The government would also weigh noise for nearby residents and jobs for workers.
- The same decision looks different to each agent, because their aims differ.
Watch out for this
A firm that maximises sales also maximises profit.
Profit is revenue minus cost. Extra sales can cost more than they bring in, so maximum sales and maximum profit are usually different.
Check your understanding
What does the government aim to maximise in the basic economic model?
- Profit for local firms, which creates jobs and incomes.
- Social welfare: the well-being of society as a whole.
- Tax revenue, so it can fund schools, hospitals and defence.
Show the answer
Social welfare: the well-being of society as a whole.
Right. The government weighs the effects on all groups, not just one.