NYJC_H2_ECONS_Q3

Question 3 a. Using examples, explain the basis by which rational decisions are being made by consumers and producers. [10] b. Assess the economic case for government intervention in the market when externalities are present. [15] Part a: Using examples, explain the basis by which rational decisions are being made by consumers and producers. Command – Explain Content – Basis for decision making for consumers and producers Context – Open The fundamental basis of economic decision making is individuals' or organizations' desire to maximize benefits while minimizing costs. This balancing act is referred to as maximizing value, and it is a sk ill that takes practice to master. For individuals, val ue maximization decisions may include choosing between name-brand products and generic products, and choosing between small or bulk sizes. For a company, value maximization involves finding the lo west-cost suppliers that meet the company's quality standards, then determining the economic order quantity for each purchase. Economic order quantity is the perfect amount of a product or material to order at a time, taking advantage of quantity discounts while also keeping holding and transportation costs under control. Explain what is involved in rational decision-making both by consumers and by firms. All economies face the problem of scarcity, a situa tion where there are unlimited wants but limited resources. Thus, choices have to be made for the best allocation of resources in an economy. Similarly, consumers and firms also face constraints and thus must also make choices. As opportunity cost is incurred when making choices, societies will choose the particular assortment of goods and services with the objective of gaining the highest level of satisfaction with the least possible cost. Both consumers and firms makes rational decision where t hey aim to maximise their self-interest. In the case of consumers, utility maximisation while in the case of firms, it is profit maximisation. This can be achieved by weighing up the opportunity cost arisin g from an activity against the benefits, by considering the marginal effects of change. Body 1: Marginalist principle applied to consumers in their decision making process A rational consumer seeks to maximise net total ben efits from consuming a good. Rational decision- making by consumers involves considering the marginal benefits and the marginal costs of consumin