How_People_Make_Economic_Decisions

How People Make Economic Decisions Student’s Name Course Title DATE Professor’s Name How People Make Economic Decisions Throughout one’s lifetime he or she will have to make economic decisions. Four individual decision-making principles will help guide one to reach the best result. Marginal benefits and marginal costs will play a major role in assessing which decision one will choose. People have to weigh the costs and benefits in any decision that they might face and with the help of the principles of economics they can determine which decision will provide them with the better outcome. The Four Principles of Individual Decision-Making People make decisions based on economic principles every day. Understanding the various principles which guide one’s behaviors will allow him or her to make better use of them and make wiser choices to maximize our level of satisfaction. The four principles play a major factor in decision making. Principle One: People Face Trade-offs Humans understand that they cannot get everything they want due to the problem of scarcity. As such, every decision made will require humans to sacrifice an alternative and this is known as a trade-off. For example, with a certain amount of money, a child can either choose to buy a packet of candy or a new toy. Choosing either one of the choices will require the child to sacrifice the other. As such, before making a decision, one will need to be aware of the trade-offs they face and whether they feel that the decision made is worth sacrificing the alternatives. Principle Two: The cost of something is what you give up to get it The second principle will be that people have to costs of each decision. This will include monetary costs and also opportunity costs. For example, purchasing a car will require one to endure the cost of thousands of dollars as well of opportunity costs in the form of benefits which one could have received if the same amount of money was used for other purposes such as investments. Principle Three: Rational People Think at the Margin When people choose to use this economic principle they make adjustments to their plan to accomplish their goal. In this case, people weigh the marginal benefits and marginal costs of each decision before making a choice (Mankiw, 2009, p 6). For example, when the purchase of a new car brings about more marginal costs than benefits, one will decide against the decision to make the purchase. Principle Four: People Respond to Incentives In today’s society, people are more likely to buy something if they get something in return. When making a decision, a person will be more likely to choose one over another for an incentive item. For example, people will be more attracted to purchase a new house if they receive a tax rebate as their incentive. Marginal Benefits and the Marginal Costs Marginal cost and benefits allow an individual to see all aspects of the decision that he or she is trying to make. An example of a decision which the marginal costs and benefits were weighed to make a decision in my life was to purchase a new computer. In my case, the marginal benefits of purchasing a new computer will be the increase in work efficiency due to better performance of the new computer. However, the marginal benefits will be the decline in disposable income which could be spent on compulsory textbooks for my education. After comparing the marginal benefits and costs, the marginal costs outweighed the benefits and hence decided against the purchase. Keeping my old computer and spending my money on textbooks, which were found to be more useful to my education, was the best decision for my situation. However, if the firm selling the computer was to offer me a discount, the outcome might have changed my decision since the decrease in prices would help save me money in the long run. Conclusion In conclusion, the four economic principles of decision-making affect our decisions and behaviors in our daily lives. These principles will affect our demand for goods and services in the economy during different context and thus affect the growth of the economy. In addition, firms and business owners can also use such information on economic principles to come up with strategies such as offering incentives in the form of discounts to boost demand which can likewise affect total level of output in the economy and thus influence economic growth. References Mankiw, N. G. (2009). Principles of Economics (4th ed.) Mason, Ohio: Cengage Learning.