Pia Shannen Odin BSA 2-D

Assignment #4

1. Describe the economic model of behavior.

- The economic behavior model investigates the psychology of how individuals

and organizations make economic decisions. Individuals have inexhaustible
desires. Resources, in contrast to wants, are limited. Therefore, they must make
use of their economic options. Choices must be made about allocating these
limited resources among the infinite wants because, in an ideal world, people
always choose the actions that will bring them the most profit. The presence of
rational choice is a critical component of this model. According to this viewpoint,
people can make rational decisions by critically evaluating the benefits and
drawbacks of each alternative, considering their preferences and constraints.
The logical individual is in control, unaffected by emotions or external influences,
and thus recognizes what is best for himself. Unfortunately, behavioral
economics shows that people are irrational and incapable of making strategic
decisions

2. Define and apply marginal analysis in managerial decisions.

- Marginal analysis is a tool for examining the differences between the increased
benefits of activity and the associated additional costs. Businesses use marginal
analysis to optimize their prospective revenues when making decisions. The
marginal benefits are the extra benefits obtained if the choice is made. Marginal
costs, on the other hand, are the additional costs incurred if the choice is made.
Whenever the additional benefits outweigh the incremental costs, efforts should
be made. This includes the potential cost of new resources, which is important
when calculating marginal costs. It also demonstrates that sunk costs unaffected
by the decision are irrelevant. A toy manufacturer, for example, should only
produce toys until the marginal expense equals the marginal benefit. The toy
manager can maximize profits by breaking decisions into measurable, smaller
pieces. Marginal analysis has applications far beyond the scope of for-profit
manufacturing processes. Marginal analysis can help with any resource
allocation decision if the costs and benefits are known.

3. Define and apply the concept of opportunity costs.

- Opportunity costs are the potential gains that a person, investor, or corporate
entity disregards by choosing one option over another. The worth of foregone
options involves trade-offs. Understanding the potential opportunities lost by
choosing one investment over another allows for more informed decision-making.
For example, if you choose to rent retail space in Dormitory for 2,5000 per
month, you will forego the opportunity to rent in Marco Polo, or even in Seda
Hotel. Assuming your other options were less expensive, your opportunity cost is
the value of what it would have cost to rent elsewhere.