Compare_a_Necessity_and_Commodity_Product,_Identifying_the_Availability_of_Sbstitutions_for_Coffe

How People Make Economic Decisions Juan D. Agramonte ECO/212 Principles of Economics August 4, 2010 Instructor: Robert Waremburg How People Make Economic Decisions Marginal costs and benefits are two important concepts that govern economics. Marginal cost is important in determining the need to adjust the rate of production. Whereas, marginal benefits are considered as the gain that will be earned if the rate of production will be adjusted. However, both marginal costs and benefits are not mere economic concepts; they are also prevalent in the practical activities of producers and consumers. They play an important role in the decision making of the people. Naturally, the decisions we have always have something to do with the benefits that we gain from something. A simple illustration of this is the basic questions we have before we purchase an item such as “Will it be cheaper if I buy one more thing'” “Will it be cheaper if we produce another item'” “What are the advantages of producing another item'” Technically, people decide based on their reasons. As much as economics is important in decision-making, decision making is also important in economics because for every decision made, both risks and advantages are involved. There are four important concepts that people consider when deciding on something (Mankiw, 2007). These are the four economic principles. The first economic principle involved in decision-making is “trade offs”. People constantly face trade offs in almost all their economic transactions. In order to get something we want, there are some things that need to be sacrificed that are also valuable to them. Second principle is almost related to trade off; it says “the thing is worth as much as the price of another you’ll give up for it”. Obviously, we want a fair trade. Second principle does not only refer to the monetary aspect of a decision; it also has something to do with all the opportunity costs involved. Third principle is “rational people decide marginally.” To elaborate, people will only take a chance on something if they realize that the marginal benefits are more than the marginal costs. Lastly, the fourth principle states that “incentives are important in people’s decisions”. Since benefits and costs are always considered, then the changes in either the benefits or costs will also affect the decisions of the people. Incentives make something more compelling. Investopedia (2010) defines marginal cost as the opportunity cost that can be acquired by simply producing another item or good from the planned production. The best example to illustrate this is the shirt printing. If a company decides to print 15 instead of 14 dresses, 14 dresses cost $140, and 15 dresses cost $150. Thus, a $10 for an extra dress represents the marginal cost of printing. The more items are produced, the price also directly increases. On the other hand, marginal benefit is the prices that people are willing to give in order to acquire another item. For instance, the money that they are willing to spend just to produce another shirt. Marginal cost, therefore, is the price or value lost to produce the extra dress. But as long as the marginal benefits offset the marginal costs, an extra dress can always be produced. Based on this very basic example, we can see just how important marginal costs and benefits are in the decisions of the company. It becomes their objective basis on whether to increase or decrease their production. It would also be easier to see how much it will cost if they decide to purchase another item. As economics affects the daily decisions of people, it consequently affects the decisions being made for the economy as a whole. The same principles are still applied in the decisions for the national and global economy. Some of the daily decisions that people make are deciding whether it is better to eat outside or just stay at home to dine. Another is the decision of buying or renting a house. Indeed, economics is all about how people manage their scarce resources to serve them well. We are directly affected by the changes in economy simply because we are consumers. We are all part of that huge economic system. References Investopedia.com. (2010). Marginal Benefits and Marginal Costs. Retrieved April 20, 2010, from http://www.investopedia.com/study-guide/cfa-exam/level-1/microeconomics/cfa5.asp Mankiw, N. (2007). Principles of Economics (4th ed.). Mason, OH: Thomson South- Western.