Chapter Two Part II

‫‪Choice‬‬
‫االختيار‬
Choice
• A key economic assumption is that individuals,
in making choices, rationally select
alternatives they perceive to be in their best
interests.
– They simply select the alternatives they expect
will yield the most satisfaction and happiness.
– Rational self-interest means
• that individuals try to maximize the expected benefit
achieved with a given cost or to minimize the expected
cost of achieving a given benefit.
Introduction
• Rational choice takes time and requires
information
▪ Time and information are scarce and valuable
▪ Because information is costly to acquire, we
are often willing to pay others to gather and
digest it for us
Choice
Marginal Decision-
Making and
Diminishing
Marginal Utility
Production
Possibility Frontier
Productive and
Allocative
Efficiency
Marginal Decision Making &
Diminishing Marginal Utility
‫اتخاذ القرارات الحدية وتناقص المنفعة الحدية‬
• The budget constraint framework helps to
emphasize that most choices in the real world
are not about getting all of one thing or all of
another.
• means comparing the benefits and costs of
choosing a little more or a little less of a
good.
• Utility is subjective.
• Economists
– typically assume that the more of some good one
consumes, the more utility one obtains.
• The utility a person receives from consuming
the first unit of a good is typically more than
the utility received from consuming the fifth
or the tenth unit of that same good
• The general pattern
– consumption of the first few units of any good
tends to bring a higher level of utility to a person
than consumption of later units is a common
pattern.
• Law of diminishing marginal utility,
– means that as a person receives more of a good,
the additional (or marginal) utility from each
additional unit of the good declines.
• The law of diminishing marginal utility
explains why people and societies rarely make
all-or-nothing choices.
• The budget constraint framework suggests
that when people make choices in a world of
scarcity, they will use marginal analysis and
think about whether they would prefer a little
more or a little less.
The Production Possibilities Frontier and Social Choices
‫منحنى فرص اإلنتاج واالختيارات االجتماعية‬
• Society as a whole cannot have everything it

might want.
• Similarities than differences between individual
choice and social choice.
• Because society has limited resources at any
point in time, there is a limit to the quantities of
goods and services it can produce.
– Suppose a society desires two products, healthcare
and education. This situation is illustrated by the
following production possibilities frontier.
The Production Possibilities Frontier and Social Choices
• Shows a trade off between devoting social resources to healthcare and

devoting them to education
The Production Possibilities Frontier
and Social Choices
• The society could choose to produce any
combination of healthcare and education
shown on the production possibilities frontier.
– Society can choose any combination of the two
goods on or inside the PPF. But it does not have
enough resources to produce outside the PPF.
Productive Efficiency & Allocative
Efficiency
‫الكفاءة اإلنتاجية والكفاءة التخصيصية‬
• In a market-oriented economy with a
democratic government, the choice will
involve a mixture of decisions by individuals,
firms, and government.
• Efficiency refers to lack of waste.
• The production possibilities frontier can
illustrate two kinds of efficiency:
– productive efficiency
– allocative efficiency.
Efficiency
Efficiency
• Productive efficiency
– given the available inputs and technology, it is
impossible to produce more of one good without
decreasing the quantity that is produced of
another good.
• Allocative efficiency
– the particular mix of goods a society produces
represents the combination that society most
desires.
Case Study: Airport Security Measures
Lead attacker Mohamed Atta
The second plan seen heading into the
2nd WTC tower

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‫‪Choice‬‬

‫منحنى فرص اإلنتاج واالختيارات االجتماعية‬

• Society as a whole cannot have everything it

• Shows a trade off between devoting social resources to healthcare and

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