How_People_Make_Economic_Decisions

How People Make Economic Decisions Jeness D Weninger ECO/212 18 October 2010 Luis Bernardo Torres Ruiz Every day, people are faced with economic situations requiring a decision to be made, whether knowingly or subconsciously. It may be something as simple as deciding between going to the movies versus renting a DVD, or as complex as calculating how much of a product or even what type of product to produce. According to Ten Principles of Economics, there are four basic principles of individual decision making that apply to all economic choices; that people face trade-offs, that the cost of something is what you give up to get it, rational people think at the margin, and that people respond to incentives (Mankiw, 2002). These decisions are what drive the economy and the goods and services produced. It is a fact that people face trade-offs. Due to limited resources, other choices have to be made in regard to purchasing goods or services. Sometimes the good or service desired is not available because of scarcity and a decision must be made to either wait for the item to be produced at a later date or purchase another comparable item now. This principle works in tandem with the principle that the cost of something is what you give up to get it. If you decide to wait until a later date to get the item you genuinely wanted, then you are giving up the time waited to get it, making time the opportunity cost. A general conclusion made by economists is that people are rational and therefore will make rational decisions and that they will do the best they can to achieve their objectives. According to Economics, “Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs” (Hubbard & O’Brien, 2010, p. 5). Finally, people respond to incentives that entice them to act quickly. This could be something as simple as a rebate on a vehicle. It could be as elaborate as putting up a security system to protect your home. For many years my husband and I lived in a manufactured home in a trailer park as it was the only housing we could afford. In 2008 we both found jobs that came with higher incomes and decided it was time to move to a traditional home. As we sat down to look at the expenses of owning a home we found that we would spend less buying a new home than what we were spending on our old one, and knew immediately that this was a good trade-off. Additionally, we discovered that there were two incentives if we purchased at that given time. First we would get a better interest rate and second we would qualify for an $8000 homeowner’s incentive for signing by a specific date. There were no incentives for us to stay in our current home at this point. We found a home that we loved and later purchased, and the only thing we gave up out of the whole situation was about 10 minutes of travel difference to our parents’ homes. In the above situation you can see the number of choices a home purchase requires. All day, every day, decisions like this are being made. These decisions drive the economy, and without the principles outlined above, the economy would suffer. References Mankiw, N. (2002). Ten Principles of Economics. Retrieved from http://academic.cengage.com/resource.../0324224729_119077.pdf Hubbard, R. & O’Brien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall