The same choice can look different to consumers, firms and government.
An economic agent is a decision maker. The basic model treats consumers as aiming to maximise utility (satisfaction), producers as aiming to maximise profit, and government as aiming to maximise social welfare (society's well-being). An objective guides a choice but does not remove constraints. Profit is revenue (income from sales) minus cost, so the most sales or highest revenue need not give the most profit. Consumer satisfaction is not identical to the number of items bought. Social welfare requires considering affected groups and relevant benefits and costs, including effects not captured by a firm's revenue. These are modelling objectives, not a claim that every real decision maker has perfect information or behaves exactly this way.
- Economic agents
- Agents are decision makers: consumers buying goods and services, firms producing them, and governments making public decisions. Their objectives are the goals they aim to achieve.
- Consumer
- In the basic model, consumers aim to maximise utility: get the greatest satisfaction available within limits such as their budget and time.
- Producer
- Firms aim to maximise profit: revenue (income from sales) minus cost. More sales do not guarantee more profit if costs rise by more.
- Government
- Government aims to maximise social welfare: the well-being of society. This involves benefits and costs across affected groups, including effects that do not appear in revenue.
Worked example: A cafe considers later opening
A cafe could open for one extra evening hour. Nearby residents include shift workers and families with young children.
- A customer weighs the satisfaction of buying a meal against the money, travel time and alternatives they give up.
- The owner compares the extra revenue with extra relevant costs such as staff time and electricity. More evening sales do not by themselves establish more profit.
- A local public decision about opening conditions would consider customers, workers and nearby residents, including convenience and disturbance. The cafe's profit alone is not a complete social-welfare measure.
- The agents can reasonably reach different conclusions because their objectives, constraints and affected benefits differ. Identify these differences before judging the decision.
Watch out for this
Government should choose whichever option earns the most revenue because that maximises social welfare.
Public revenue is one consideration. Social welfare also concerns benefits, costs and their distribution across people, including effects without a direct payment.
Check your understanding
A firm's weekly revenue rises by $200, but its total cost rises by $250. What follows?
- Profit rises because sales revenue is higher.
- Profit falls by $50.
- Consumer satisfaction must fall by $50.