How_Individuals_Make_Economic_Decisions

How Individuals Make Economic Decisions In life decisions are made every day. Ideas and the decisions that follow those ideas are the choices individuals make each day. It is implied, most people make sound rational choices and decisions. Rational people consider the benefits and costs of each decision, and they make decisions only if the benefits prevail over the costs. Unfortunately, everyone does not make rational decisions all the time. Rational behavior is a practical way to understand decisions people make. The four principles of individual decision-making are: People Face Trade-Offs, People Think Marginally, People Respond to Incentives, and People weigh the Cost and Benefits (Mankiw). Trade-offs occurs when a people must give up something to receive something else. Time is a good example of this principle, a person can choose to spend his or her time studying for a test to guarantee a reputable grade or spend the time partaking in activities with friends and family or playing games online, which can cause them not to pass the class. The final decision will be created on the decisions we make (Hubbard & O'Brien, 2010). People think and make decisions marginally. People make small incremental adjustments toward decision making. The optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost. An example of this principle, a cruise line charges $1,300.00, for a cabin. The as the departure date moves closer the cruise line may offer cabins at a marginal discounted rate or at a marginal increased rate based on customer demand (Mankiw). People respond to incentives, whether it is positive or negative. An incentive is something that induces a person to act, such as the prospect of a punishment or a reward. Marginal change in cost or benefit encourages people to respond to the incentive positive or negative (Hubbard & O'Brien, 2010). People act from a variety of motives, such as spiritual belief, greed, and sympathy. People repeatedly respond to economic incentives, such as, buy one and get one free and deadline purchases (sales). A positive incentive can be described as; a consumer getting twice the benefit at half the cost. Discount deadline incentives occur when a purchase must be made by a dead line or the price will marginally increase (slideshare.net) People weigh the cost and benefits of a decision. A person will make a decision when the marginal benefit is greater than the marginal cost. An example is giving up time, wages to go to school, and gain education for higher pay in the future (Mankiw). In conclusion, people face trade-offs when making decisions between alternate choices. The costs of decisions are measured by inescapable opportunity. Decisions are also made by comparing the marginal cost of a choice and marginal benefits of a choice. Incentives can change the decisions between the choices people make (slideshare.net) Reference Mankiw, N.Gregory. Principles of Microeconomics (5th), textbook problems explained step-by-step. Slikdeshare.net. Ten Principles of Economics, http://www.slideshare.net/mohanrajvenu/ten-principles-of-economics-