What this lesson teaches
I can state what consumers, producers and governments each aim to maximise: satisfaction, profit and social welfare.
Syllabus 9570, 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
I can describe how people and firms gather information, weigh costs and benefits, and review choices and their side effects.
Syllabus 9570, 1.1.2(b). Decision-Making Process of Economic Agents: In the pursuit of their objectives, economic agents gather information, weigh benefits and costs, consider constraints and perspectives before making decisions. They take into account the intended and unintended consequences, and any changes occurring, before reviewing the decisions
Make a guess
Your total marks keep rising with every extra hour of revision. Should you keep revising until they stop rising?
- Yes, as long as you are not too tired to read.
- No. Stop when the next hour adds less than it costs you.
- No. Stop after the hour that gave the most marks.
- Yes. Extra marks are worth the study as long as they keep rising.
Show the answer
No. Stop when the next hour adds less than it costs you.
Total marks can still rise while each extra hour helps only a little. Once that small gain is worth less than the sleep or rest given up, stop.
Take one more step only if the extra benefit is greater than the extra cost.
Most decisions are not all-or-nothing. They are about a little more or a little less: one more hour of study, one more worker, one more bus route.
Marginal means additional. Compare the marginal benefit (the extra benefit of one more step) with the marginal cost (the extra cost, including what you give up).
Keep going while marginal benefit is greater than marginal cost. Stop when the next step would cost more than it adds.
Usually, marginal benefit falls as you do more (the fourth hour of revision helps less than the first), while marginal cost rises.
- Rule
- Continue while marginal benefit > marginal cost.
- Marginal
- Means additional.
| Block | Extra benefit | Extra cost | Net gain |
|---|---|---|---|
| 1 | 18 | 6 | +12 |
| 2 | 13 | 8 | +5 |
| 3 | 9 | 10 | -1 |
| 4 | 4 | 12 | -8 |
Worked example: How many revision blocks?
A student values each extra revision block at 18, 13, 9 and 4 points, and the extra cost (tiredness and time given up) at 6, 8, 10 and 12 points.
- Block 1: benefit 18 > cost 6, so do it.
- Block 2: benefit 13 > cost 8, so do it.
- Block 3: benefit 9 < cost 10, so stop.
- Two blocks give the largest net benefit: (18 - 6) + (13 - 8) = 17 points.
Watch out for this
Keep going as long as the total benefit is still rising.
Total benefit can rise while the extra benefit is smaller than the extra cost. Compare the marginal values.
Check your understanding
The marginal benefit of a third tuition lesson is $40 and its marginal cost is $55. What should the student do?
- Take the third lesson, because it still has a benefit.
- Stop at two lessons.
- Take more lessons until total benefit stops rising.
Show the answer
Stop at two lessons.
Right. The third lesson adds more cost than benefit.