How_People_Make_Economic_Decisions

How People Make Economic Decisions “Economics is the study of how society manages its scare resources” (Mankiw, 2007, p. 4). Part of studying economics is looking at behavior of the individuals who make up the economy and how they make decisions (Mankiw, 2007). According to Gregory Mankiw (2007) there are four principles of individual decision-making (p. 4). The following are the four decision-making principles: 1. People Face Trade-offs – Part of decision-making requires individuals to decide what they will give up in order to accomplish or acquire something. 2. The Cost of Something Is What You Give Up to Get It – Reviewing the cost and benefits of what is being given up in order to achieve a goal. 3. Rational People Think at the Margin – “Making decisions by comparing marginal benefits and marginal costs” (Mankiw, 2007, p. 6). Meaning to look at the losses and gains arising from a small change in variables. 4. People Respond to Incentives – A punishment or reward that makes people act. Marginal benefits and marginal costs can be seen in every day decision-making. An example in which marginal benefits and marginal costs can be seen is in deciding whether to purchase exercise equipment when a person already has a membership to the gym. First thing to think about is what kind of benefits purchasing exercise equipment would give. Joining a gym could cost, at a minimum, $30 dollars a month, with a total of $360 dollars a year. Most contracts are at least two years which could make the total membership around $700 dollars. The assumption with joining a gym is that all equipment supplied would be used. Meaning that a member all the facility equipment to achieve a complete workout. Unfortunately, every member is different and due to the lack of privacy some would only utilize the offered equipment that they are comfortable working out on. For instance, individuals may find that they only do cardio because they are uncomfortable doing weights in a crowded gym, therefore they would not use all that the gym offers. Purchasing workout equipment could be considered a good investment if the current workout is not meeting your goals. For instance, purchasing the Total Gym to meet the workout goals as well as being able to exercise in private. Although this equipment is normally priced at $652 dollars, plus shipping and handling, it can be found at QVC for $348 dollars with shipping and handling included as well as an added incentive of paying the equipment in four monthly payments. The marginal benefit of purchasing the equipment would mean developing a more rounded exercising routine to promote a healthier lifestyle and if used as planned it would exceed the marginal costs of the machine and the gym membership. If research found that the equipment was not available at a lower price then it wouldn’t be considered a good investment as the costs is the same as a gym membership. The principles of economics include the study of how people make decision, interact with each other and analyze the trends that affect the economy. As a whole the economy depends on productivity which in turn affects the standard of living, how government controls prices by controlling inflation, and how society deals with inflation and unemployment. The principles of economics help to determine where all the individual influences fit and how to review what and why the economy changes. References Mankiw, G.N. (2007). Principles of economics (4th ed.). : Thomson Learning, Inc.