Microeconomics rests on certain assumptions about individual behavior. One is that people are capable of envisioning various ways of improving their position in life. This chapter reviews and extends the discussion begun in chapter 1 of how people – businesspeople included – cope with scarcity, which means choosing among the alternatives for improvement people can envision. According to microeconomic theory, consumers and producers make choices rationally, so as to maximize their own welfare. This seemingly innocuous basic premise about human behavior will allow us to deduce an amazing variety of implications for business and many other areas of human endeavor. The premise undergirds our study of mutually beneficial trades considered in chapter 1 and the forces of supply and demand to be covered in chapter 3. The assumption of rationality is at the core of the economic way of thinking about everything, including managing and thinking itself.

Part A Theory and public policy applications

Rationality: a basis for exploring human behavior

People's wants are expansive and ever expanding. We can never satisfy all our wants because we will always conceive of new ones. The best we can do is to maximize our satisfaction, or utility, in the face of scarcity.