In large part economics is a science of choice. How does mainstream economics inform the choices individual consumers and firms make? Explain in detail using diagrams if necessary

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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It is very hard to say whether mainstream economics affects the actions of individuals or firms.  It is more likely that it affects the actions of firms because the people who make decisions in businesses are much more likely to have a background in economics than the average person is.  The average person may have never taken a class in economics and is therefore probably not strongly affected by the principles of mainstream economics.  Mainstream economics is meant more to explain people’s choices than to influence them.

Most people’s decisions are affected by an innate understanding of economic concepts like supply and demand, but not by an actual understanding of the teachings of mainstream economists.  People will, for example, tend to use less gasoline when the price of that commodity goes up.  They will drive less and buy cars that consume less gas.  They do this because they want to save money, not because they have taken economics and know that mainstream economists say that an increase in price should lead to a decrease in quantity demanded. 

Firms are more likely to base their decisions on mainstream economics.  The people who make the decisions in these firms have likely been exposed to a good deal of mainstream economic thought while in school.  When the CEO of a business decides to invest in capital goods, he or she may well be doing so because they know that mainstream economists say that investment in the present will allow their firm to make more money in the future.  Managers are likely to have been told that they should keep their firms running, even if they are losing money, so long as their marginal revenue is greater than their average variable costs.  These sorts of decisions are less intuitive than those made by individuals.

In short, it is likely that firms make choices based on the teachings of mainstream economics.  The choices they have to make are often more complex than those faced by individuals, and the decision-makers in business are likely to have more knowledge of mainstream economics.  Individuals, by contrast, are less likely to be affected by mainstream economics in the decisions that they make.   

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