How_People_Make_Economic_Decisions

How People Make Economic Decisions Introduction Studying the basic principles of economics has altered my decision making in some sense. I'll think of opportunity cost, etc. when it comes to buying things, but when it comes to my time, I don't really think about that so much. I find that having my life follow rational principles of economics takes all the spontaneity out of it, and it just isn't fun; however, I believe it has influenced me at least a little bit. I’m affected through the economy because I’m a consumer. By being a consumer I’m a part of the system. Through elasticity/inelasticity I’m at the whim of whoever is making the decisions at the top with some items like gasoline. Principles of Individual Decision-Making Society faces trade-offs: producing more of one good or service means producing less of another good or service. for example people make trade-offs - there is a cost for everything and people value goods and services based on these costs. Opportunity cost is the cost of something is what you give to obtain it. Rational decisions are at the margin - people make decisions to make themselves happy. For example, if one would prefer to have more money, they would value this against having to work more. They are comparing the marginal cost of working to the marginal benefit of additional income. People respond to incentives - people only act when there is a perceived benefit. This benefit is the incentive. In short, people do what they perceive will make them happiest. Marginal benefits are theoretical gains that you would make from some discrete action on the margin. Marginal costs are theoretical losses. For example, if you are out of shape you may consider the marginal costs and benefits of exercises. On the one hand, you will receive a benefit from working out today. On the other hand, it will take some pain and effort. It is up to you to decide whether the marginal benefit or cost is greater. If everyone acts in a manner that most pleases themselves, then human interaction involves coincidence of desires. If people can make deals to mutually improve each other's lives, it will be an incentive for cooperation. Much of civilization is based on this concept - individuals' selfish desires are an incentive for decision-making, cooperation, and the mechanisms of an economy. Economic principles do affect my decision making, my interaction with others and the economy as a whole. To cite an example, when prices of chicken and hence chicken sandwiches fell, I started taking more of chicken sandwiches at restaurants and only slightly increased my eating of hamburgers whose prices remained the same. This was mere economic rationality. There was a substitution effect and income effect that increased my consumption mostly in favor of the relatively lower priced item. Given by budget constraint on lunch expenses, and given my greater preference for chicken sandwiches, I had to shift towards chicken fiord a larger number of weekday lunch meals. However, my husband argued that he would not increase the quantity of chicken for dinner, he would rather reduce it and spend the saved amount for organic green vegetables whose prices have risen and he asked me for larger amount for the family budget. But I had a fight with him. I said that my income has gone down after the Fed reduced the interest rate : my interest earnings on bond investments had declined. But he kept on nagging. So, I thought over and over again. I found that I was having excess investments: with the bond prices rising the marked to market value of my bond investments had risen. So, I sold a small part of my bond investments and booked a good profit and purchased her a nice gift and went to see Despicable Me movie and enjoyed the evening. The above was just an illustration. In everyday life, we deal with problems that are solved rationally by using economic principles of resource allocation to optimize satisfaction and costs, take advantage of price changes. Another example of marginal benefits and marginal cost associated with a decision is going to school. MC is tuition and all the money I could have earned if I worked full-time, MB is higher salary as the result of degree. Conclusion Economics is the study of scarcity. All things are scare, water, air, money and oil. Some things are more finite than others. We as consumers decided what we want and what we buy at a certain price point. The choices determine how much of something is produced. More demand= more supply. Price will rise and fall based on the interactions between supply and demand. Less supply coupled with high demand = high price. A glut in the market resulting in high supply and low demand = low price. The economy is a place for these interactions. It all comes down to choices based on scarcity and price. Resources Economics, Third Edition, by R. Glenn Hubbard and Anthony Patrick O’Brien. Published by Prentice Hall. Copyright@2010 by Pearson Education, Inc. Ch01,02, 03, 06 and 09