Economic_Decisions_Paper

How People Make Economic Decisions On a daily basis people make economic decisions. From buying a gallon of milk to paying their bills each transaction is an economic decision. When people make these decisions they take four principles into consideration. They are people face trade-offs, the cost of something is what you are willing to give up to get it, rational people think at the margin and people respond to incentives. Even if people do not rationally think about these principles, they are using these four thoughts before making a decision. When people exchange money or a good, they are making a trade off because they cannot have both at the same time. They are also paying a cost for a product when the give money for a product because they were willing to give up the money for a product. If an incentive is offered such as a buy one get one free, they are willing to give up more or even purchase more to get this item. All of these examples are how individuals use the above listed four principles when making an economic decision. In the textbook Economics, the authors point out that when economists use the word marginal, they are talking about something extra or additional (Hubbard & O'Brien, 2010 p.6). They also talk about marginal benefits and marginal costs and how people strive to have these principles equal each other. They state “Economist reason that the optimal decision to continue any activity up to the point where the marginal benefit equals the marginal cost” (Hubbard & O'Brien, 2010, p.6). A personal example of this theory would be on a recent trip to Las Vegas, a decision was made to play blackjack. Some thought went into this decision before playing, how long would this entertainment last and how much would have to be spent playing. Weighting out all the options, a decision was made to go ahead and play. After spending a few hours at the table, a decision was made to give up the game and walk away. The marginal benefits to this decision were a few hours of entertainment while the marginal cost meant that a few hundred dollars had to be spent to enjoy this entertainment. As casinos like to do incentives were given to play this game. A free trip to the buffet was given as well free drinks while playing. If these incentives were not given, the few hours of entertainment might have turned into only fifteen or twenty minutes. On the other hand, if more incentives were offered such as a complimentary night at the hotel, maybe the game would have been played longer than it was. Not only do these principles of economics affect a person individually, they have an effect on the economy as a whole. If people are unwilling to make tradeoffs for a product, fewer products will be sold. If people are unwilling to give up something such as their hard work, or money for a cost of an item commerce would be virtually non-existent. If people began to think irrational and not think of margins, people might be in worse place finically than they are currently and if incentives were not in place, people would be less likely to purchase goods or a larger quantity of the same good. All of these factors would have a drastic effect on the economy. The four principles of individual decision make not only affect a single person, they keep the economy and our market going. References Hubbard, R., & O'Brien, A. P. (2010). Economics (3rd ed.). Upper Saddle River, NJ: Prentice Hall.