Homo Economicus: How People Make Economic - Essay Example

People are not purely self-interested: They buy for friends and family, give to charity, etc. Taking into this account, how might my personal behavior patterns show a different type of decision process?

            I was at a fast food place once grabbing a burger to eat. Inevitably, “upselling” at the end of the transaction occurs when they offer fries and a drink. I almost instinctively said “Yes”, then began to do marginal analysis. I would save money, but how much? Looking at the menu, I found that the a la carte cost would be thirty cents more. I didn't really want fries and a drink, I would only have purchased it out of an irrational desire not to miss a deal even when the deal is not necessary. I ended up changing my mind and saying no and was very glad to have saved the two dollars. The marginal benefit of the additional food and the beverage did not eclipse the marginal cost, even though I had lost an opportunity and therefore incurred opportunity cost by not pairing the meal.

            Normally, I would have chosen such a meal: I just happened to be thinking about it. I might even have ingested the calories happily, not realizing I actually hadn't been that hungry, causing me to eat more than my plan for the day. The fast-food place thus already has a powerful incentive: The desire for people to avoid a missed opportunity combined with a nominal discount on associated items. I might have taken the deal had the meal been even twenty cents cheaper. They could probably offer the soda for ten cents and make an immense profit due to how cheap soda is. “[E]nough concentrate for 50,000 Cokes costs $2.60—including labor” - in short, for Coca-Cola itself, a single cup costs $0.000052. Even with a hundred-fold markup, that is $.0052 for the fast-food company, and even if I drank ten cups in my brief stay, it still would cost $.052. Ten cents would be a two-fold profit even under these ludicrously unrealistic conditions which more than take care of overhead.

            The principles of economics indicate that people try to in general maximize return on investment in every arena of life from consumption to production to distribution. Any departure from this is “inefficient”. But even if people did behave this way, which they don't, this definition of efficiency is ludicrous.

            Market economies are determined by negotiation between decentralized agents to determine prices. Centrally planned economies have a central agent, usually, the state, which determines choices of production, distribution, and allocation as well as cost. Mixed economies have both. Ours is mixed in two ways: Firms are internally central planning actors, and the government is heavily involved, but markets still are used. The interactions in an economy are heavily determined by these factors. Markets give some kind of antisocial incentives, for example: To externalize costs onto others, or the “tragedy of the commons” where public goods are undervalued. Central economies, on the other hand, give other kinds of antisocial incentives: To not work as hard because one can't seek a maximum return or an overvaluing of public goods causing artificial avoidance of smaller or private solutions.