Lecture 2

LECTURE 2:
ECONOMIC
ASSUMPTIONS
TEACHER: MEHNAZ KHAN
Economics is a social science that studies how individuals
make decisions about the allocation of scarce resources.
Economic models help predict the behaviour of variables

(such as inflation, unemployment, consumer spending and
wages) and to explain the cause of certain events.
In using these models, economists are required to make

some assumptions about the behaviour of individuals.
What does it mean to behave rationally in your
daily life?
Can you think of a recent decision where you
aimed to maximize your benefit?"
•Definition of Consumer Rationality:
•Economists assume consumers aim to maximize their satisfaction
(utility) from the choices they make.
•Examples of Rational Consumer Behavior:
•Price Comparison:
•example: If three stores sell the same product, a rational consumer
would buy from the store offering the lowest price.
•Quality Preference:
•Explain: When faced with products of the same price, a rational
consumer would select the highest quality option.
Business Rationality
•Maximization of Profit: Business owners are assumed to always

seek to maximize profits. This means choosing the most cost-
effective suppliers and setting prices that yield the highest possible
revenue.
•Examples of Rational Behavior:

• Cost Efficiency: A business owner will buy the cheapest
available raw materials, assuming quality is constant.
• Pricing Strategy: A rational business owner will charge the
highest price that the market can sustain to maximize revenue.
Why Consumers Might Not Always Maximize Benefit
•Difficulty in Measuring Satisfaction: Consumers often struggle to
quantify the satisfaction derived from different options, which can
lead to suboptimal decisions.
•Habitual Buying: Consumers may develop habits or brand

loyalties that lead them to make irrational choices, such as sticking
to a familiar brand even when better options are available.
•Influence of Others: Consumer choices can also be influenced by

the behavior of parents, peers, or societal trends, leading to
decisions that do not maximize personal benefit.
Do you think all businesses aim to maximize
their profits?
Can you think of a situation where a business
might prioritize something else?"
REASONS WHY PRODUCERS MAY NOT ALWAYS
MAXIMISE THEIR PROFIT
1.Delegation of decision-making
2.Alternative objectives
3.Information asymmetry.
Delegation of Decision-Making:
•In many businesses, owners delegate decision-making to managers or other

employees. These individuals may have different objectives than the owners,
which can lead to decisions that do not maximize profits.
•Example: Sales managers might focus on maximizing sales revenue because
their bonuses depend on it. However, lowering prices to increase sales volume
might reduce the profit margin.
•How might the goals of different departments within a company conflict

with the overall goal of profit maximization?“
•Eg. marketing spending to build brand awareness versus cutting costs to
increase short-term profits.
Alternative Business Objectives
1. Focus on Non-Profit Objectives:
• Some businesses prioritize objectives other than profit, such as customer satisfaction,
environmental sustainability, or social impact.
• Example: A company might invest heavily in customer service to build long-term
customer loyalty, even if it reduces short-term profits.
2. Social Enterprises and Charities:

• Social enterprises and not-for-profit organizations often prioritize social or
environmental goals over profit.
• Example: MitiMeth, a Nigerian social enterprise, focuses on solving ecological
problems by creating products from water hyacinth, prioritizing environmental well-
being over profit maximization.
Interactive Activity: Research a social enterprise or charity and present how its
objectives differ from traditional profit-driven businesses.
The Role of Information in Maximizing Profits and
Benefits
Information Asymmetry:
Both consumers and businesses need access to accurate and complete
information to maximize their benefits or profits.
Example: A consumer might fail to find the lowest price for a product due
to a lack of information, leading to suboptimal decisions.
1.Impact of Technology:
1.The internet and social media have increased the flow of information,
making it easier for both consumers and businesses to make informed
decisions.
Example: Online price comparison tools allow consumers to find the best
deals, while businesses can use data analytics to optimize their pricing
strategies.
How has the availability of information through the
internet changed the way businesses and
consumers make decisions?"

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LECTURE 2:

Economic models help predict the behaviour of variables

In using these models, economists are required to make

•Examples of Rational Consumer Behavior:

•Maximization of Profit: Business owners are assumed to always

•Examples of Rational Behavior:

•Habitual Buying: Consumers may develop habits or brand

•Influence of Others: Consumer choices can also be influenced by

•In many businesses, owners delegate decision-making to managers or other

•How might the goals of different departments within a company conflict

2. Social Enterprises and Charities:

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