Economic_Decision_Making

The Principles According to Mankiw (2007) there are four principles of individual decision. The first is people face trade-offs. I believe this holds true in life. To attain something you like, you may have to give up something in return. I use this principle daily.- I will ask one of my coworkers to pick up lunch for us but I pay the bill. This trade off works so I can continue work without a disruption and eat lunch in exchange for a small cost. The second principle is the cost of something is what you give up to get it. We will take something as simple as a gallon of milk. Many people will gladly give up capital (cash) for milk without giving it a second thought. The cash that is used in exchange for purchasing milk is what is given up. The third principle is rational people think at the margin. I work in the hospitality industry and can relate this principle selling rooms. People may book a room at $189 a night weeks out, but as the date gets closer and the hotel is not full, the price may decrease to $119 a night. The hotel is here with doors open no matter if we sell rooms or not. The fourth principle is people respond to incentives. I believe this is the most powerful of the individual decision making principles. The downside is the incentive has to be worthwhile in the eyes of the person receiving it. If someone is asked to come to work on a day off and offered free lunch on top of a days wages he or she needs to decide if that is a worthwhile incentive. On the other hand, if someone is asked to come in on a day off and are told the pay will be double, I believe the bigger incentive trumps the first one and is definitely worthwhile. The Decision I recently made a decision to have Lasik surgery done after 30 plus years of wearing glasses. Wearing and having corrective lenses has been an inconvenience. Glasses break, get misplaced, and prohibit some activities that one may enjoy. Wearing a headband in my hair is uncomfortable because the end meets at the back of my ears where the glasses also sit. It is an expensive surgery that is usually not covered by insurance and was going to cost $3,198.00. A few months prior, I made the decision to go back to school, another added expense. During this time I also quit smoking. When taking into account the decision for the surgery, I looked at the expense compared to other expenses that I currently had and then I needed to decide if the benefits outweighed the cost. I had planned and budgeted to complete my degree in December 2011. If I had the surgery, the trade off would be worth two classes. That would move my projected date for completing my degree to February 2012. Moving graduation two months was not a big sacrifice considering my real goal is just to complete my degree. I then looked at the fact that I quit smoking. A carton of cigarettes costs around $40 on average and I was purchasing a carton a week. Calculating that out over a year comes out to $2080 which I would now be saving and could put the savings toward the Lasik surgery. With that in mind, staying smoke free was an incentive to getting Lasik. The surgery did not seem so far out of my budget reach anymore. The marginal cost was now only $1,118 and to break it down further, surgery was now only $559 an eye. The Outcome After all the facts were clear and the costs and benefits analyzed, the final decision was to have the surgery. I did not realize another benefit was the freedom I found with 20/15 vision. As I look back now, I can see how all four principles played a part in the decision making. I never realized how economics can play a part in decisions one makes in life.