How_People_Make_Economic_Decisions

How People Make Economic Decisions LaWanda Burns Eco 212 October 18, 2010 How People Make Economic Decisions In today’s economy, the consumer is faced with making decisions daily; each choice that we make has risk associated with it. When making a decision we should keep in mind the three principles of individual decision-making, which are trade-offs, scarcity and incentive. During these times, we face a trade-off. Trade-off is the idea that because of scarcity, producing more of one good or service means producing less of another good or service. There are simply not enough goods and services to satisfy everyone’s consumption desire. (Wikipedia, 2010) Scarcity is a situation in which unlimited wants exceed the limited resources available to fulfill those wants. When we decide to give up something, we lose the benefits of its services to or incur costs to obtain the benefits of the items we actually need. Making decisions requires comparing the costs and benefits of alternative courses of action (Wikipedia, 2010). A rational decision-maker takes on an action if and only if the marginal benefit of the action exceeds the marginal cost (www.investopedia.com, n.d.). Sometimes the goals that we set for ourselves are taken for granted. We tend to put them on the side and come back for it later instead of setting a goal to complete the action. People respond to incentives by assessing costs or profits, behaviors may change when the costs or profits change. As buyers we must price compare to find the best deal. Whether it is looking for a cell phone or searching for a home. We have to make decisions that will aid us in the end. When purchasing a computer, I had to decide whether or not I wanted an inexpensive computer that will do minimal work or do I want an expensive computer that will execute ever task. In making my decision I had to make a marginal decision by comparing both computers, deciding on price, execution, and memory. I also looked at reviews on whether or not consumers were developing problems with their systems or was it producing excellent execution. The marginal cost of producing this product is a critical concept to economics. In general, marginal cost at each level of building includes any extra costs required to make the next unit. If producing additional computers requires, for example, building a new factory, the marginal cost of those extra computers includes the cost of the new factory. By choosing the expensive computer, I use the incentive that the unit I purchased was a touchscreen, I can use the mouse at minimum or not at all and I wouldn’t have to upgrade to a new unit for about five years. The principles of economics related to decision-making, is very important in this generation. Everyone is into comparison shopping and trying to obtain the best deal for their dollar. When the economy changes we tend to interact with the change, trying to adjustment to the decline. When the economy is up, we tend to buy and spend more. Market economy is an economy in which the decisions of households and firms interacting in markets allocate economic resources. The main attribute of this economy is that it relies on privately owned firms to produce goods and services and how to produce them (Wikipedia, 2010). Centrally planned economy is an economy in which the government decides how economic resources will be allocated. The main attribute of this economy controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output (Wikipedia, 2010). Mixed economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. The main attribute is to regulate the market for environmental concerns. References Principle of Economics. (n.d.). Retrieved from http://www.depts.alverno.edu Wikepedia. (2010, October 13). Wikipedia. Retrieved from http://wikepdia.com www.investopedia.com. (n.d.). Investopedia. Retrieved from http://investopedia.com