Chapter 3 – Rationality, Profit Maximization & Market Theory

People act to maximize perceived net benefit ⇒ weigh costs vs. benefits “as they see them” (subjective)
Economic rationality ≠ psychological validity; it simply predicts purposeful, self-interested choice
Key implication: individuals do not knowingly choose to be worse off
Errors & bad outcomes possible (information gaps, luck) but do not violate rationality

Columbus used Paolo Toscanelli’s underestimated distances (e.g. Europe→Japan $2,400$ mi vs true $10,600$ mi)
Advisors in Portugal, Spain, England rejected plan; Queen Isabella eventually funded voyage $1492$
Decision rational because perceived benefits > perceived costs, despite factual error
Outcome: Spain gained New World riches; example of “mistake + luck”

Cost–benefit framework allows moral/ethical utilities (love, virtue, honesty) in the “benefit” column
Unselfish acts remain rational if giver derives sufficient utility from altruism

Assume firms seek to maximize profit (not revenue alone, not cost minimization alone)
Profit = money the firm keeps; objective aligns with owner self-interest

1️⃣ No viable alternative goal proposed; other suggested goals (maximize wages, lose money, etc.) unrealistic
2️⃣ Positive description, not moral endorsement; unethical acts (e.g. slavery) stem from value choices, not the assumption itself
3️⃣ Theory of Voluntary Exchange: voluntary market trades make each party better off ⇒ society improves unless large third-party costs
4️⃣ Adam Smith: self-interest, when disciplined by competition, promotes social welfare (“invisible hand”)

Human Nature (basic needs) + Self-Interest (profit/utility motive) + Competition ⇒ Social Benefit
Competition redirects greed toward serving consumers; without sufficient competition, benefits disappear
Supports limited regulation (laissez-faire) provided markets remain competitive