How_People_Make_Economic_Decisions

Running head: HOW PEOPLE MAKE DECISIONS How People Make Decisions Anna Moess ECO/212 University of Phoenix Basil Al-Hashimi September 13, 2010 How People Make Decisions Making decisions is a part of every day life. We make decisions without even thinking about them; we go from something as simple as choosing which sweater to wear, to which route to use on our way to work, to deciding if we want to take the next step in our relationship or job in a matter of minutes. We make personal decisions as well as economic decisions. We decide if we want to take our lunch to work, or if we will pay for lunch, we decide if we drink the office coffee or buy a cup on our way in. Those are small decisions that we make in seconds, while we think and debate about bigger decisions for a while. However, the question is, what influences our decisions. This paper will discuss the three economic ideas related to individual decisions, and the author will give a personal example of a decision, what the marginal costs and benefits were, and what incentives could have changed that decision. Additionally, I will explain how the principles of economics affect decision-making, interaction, and the workings of the economy as a whole. The three economic ideas related to individual decisions are: people are rational, people respond to economic incentives, and optimal decisions are made at the margin. Economists assume that buyers and sellers use all the information available to them to achieve their goals. Rational individuals weigh the benefits and costs of their actions, and only chose the action if the benefits outweigh the costs. Economists also point out that buyers and sellers consistently respond to economic incentives, which has been proven in late history with the cash-for-clunkers incentives, and the $5000 tax refund for homebuyers. Additionally, economists reason that the ideal decision is made when any activity is continued up to the point where the marginal benefits equal the marginal cost. In short, how much benefit do I gain from a certain purchase' (Hubbard, & O’Brien, 2010) I will use the purchase of a big screen HDTV as a personal example. The TV had to be at 40” wide, and a video mode of 1080P. The marginal benefit of the purchase was the entertainment value of watching television and movies on a high-definition TV. The marginal cost was investing an entire bonus check on the purchase of the TV. Different TVs were researched upon price, size, and video mode. The time of the purchase was around Father’s Day, which meant sales in many of the electronic stores. The purchase was made for a Sony brand TV, which offered the lower range of wanted size, but offered the wanted video mode, and twice the Hz than planned. Similar to the three economic ideas, I made a rational decision by researching the product, was influenced by economic incentives, and decided at the margin of the best product for the least amount of money. The only incentive that would have changed the decision would have been a bigger screen size for little money more. The basic principals of economics are supply and demand, and the purchase of power of consumer and seller. If the price of a product falls, the quantity of the product demanded will increase and when the price rises, the demand will fall. Both consumer and seller have an effect on this. If the seller decreases the price of an item, the consumer will buy more of that product because the consumer has more money to spend on the product. If the consumer buys more of a product because he or she needs or wants it, the price will decrease because the seller is making more money, which means the seller can produce and sell more. The purchase power of both seller and consumer are the deciding factors in the economy as a whole. The more income is available to the consumer, the more income is available to the seller to produce more and charge less. (Hubbard, & O’Brien, 2010) Conscious or not, we make decisions based on the three economic ideas related to individual decisions. We find all the related information to make a rational decision, we are influenced by incentives, and we decide at the margin, in which the marginal benefits outweigh the marginal costs (Hubbard, & O’Brien, 2010). The example of the HDTV purchase showed all the economic ideas, and showed how important incentives are. Supply and demand, and purchase power are what ties the economy together and what drives it along. If the purchase power of the consumer and the seller is low, the supply and demand is low, slowing down the entire economy. Recent history has shown this to be true; our economy cannot recover until the purchase power of the consumer rises, rising the purchase power of the seller along with it. Reference Hubbard, R. & O’Brien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall.