How_People_Make_Economic_Decisions

How People Make Economic Decisions ECO/212 January 20, 2011 How People Make Economic Decisions Society forces everyone to make decisions. The decisions people make ranges from what to eat, to what to buy. This paper will cover the principles of decision-making, marginal benefits and marginal costs, incentives, principles of economics, and economic interactions. Trade-offs, opportunity cost, marginal changes, and incentives are the four principles of decision-making. In economy nothing in life is free, so this study will began with discussing trade-offs. Trade-offs is the idea that because of insufficiency, manufacturing more of one service or good means manufacturing less of another service or good (Hubbard & O’Brien, 2010). The second principle is opportunity cost, which Hubbard and O’Brien (2010) define as the highest valued alternative given up to engage in an activity. The third principle is marginal changes or analysis. Economist speaks of the term marginal changes or analyst to illustrate undersized incremental alterations to a plan of action. Rational people decide by comparing marginal benefits and marginal cost. Incentive is the fourth principle. Incentive is something that encourages a person to act. Incentive can appear in the form of punishment or a reward. Coherent people react to incentives because they formulate decisions by comparing benefits and expenses (Mankiw, 2007). Personal Experiences Every day people make decision based on comparing the marginal benefits and marginal costs between certain items. Once a week I have to decide whether I should cook on Thursdays for my family or should we order in. Although cooking is cheaper and healthier, my family and I order in on most Thursdays because of lack of time and ordering in saves less time, and is convenient. A home cooked meal is healthier and cheaper; this represents marginal cost, whereas ordering in saving more time represents marginal benefits. Incentives that could have led me to make a different decision are time and money. If I had more time and less money, I would cook a meal for my family opposed to ordering in and paying more money for less quality and delivery charges. Principles of Economics The principles of economics relate to decision-making. When the economy produces more productivity, people have the opportunity of earning more money. The amount of money a person earns can alter his or her decision-making. Mankiw (2007) divides the principles that describe how people interact with one another into three parts; 1) trade makes everyone wealthier, 2) markets are typically a good way to categorize economic movement, and 3) government can progress market results. “The economy” is every decision made by individuals as well as the interactions they make with one another. To explain how the economy operates, Mankiw (2007) divided the principles into three parts. The first principle is a country’s customary living standards rely on their capability to manufacture goods and services. The second principle is prices increase when the government produces too much money. The third principle is the world faces short-run trade off among unemployment and inflation. Economic Systems Societies arrange their economies into two parts-- centrally planned economy and a market economy. The main attribute of a centrally planned economy is government employees manage stores and factories. In a market economy, companies should produce a good or service that meets the wants and needs of the clients, if not the companies will lose revenue and go out of business. An attribute of a mixed economy is this economy involves buyers, sellers, and the government. A mixed economy operates by supply and demand (Hubbard & O’Brien, 2010). Economic Interactions Many refer to the United States as a mixed economy because most economic decisions come out from the economic interaction of buyers and sellers. A business must cater to the demands of the consumer or the firm will go out of business. Therefore, the more money the economy accumulates from each business, the more interactions society produces between people. On the other hand, societies exercise fewer interactions when the economy lacks revenue. Trade and competition is not a win-lose situation. The more business the economy produces, the more jobs society makes available for others, which generate more revenue and interactions between buyers and sellers in the economic system. Conclusion The amount of money a person makes affects the economy and economic interactions between one another. If one business fails, everyone fail. If one business succeeds, everyone succeed. Economics determines which, how, and who produces goods and service. Economics evaluate activities in the economy. Economy dictates the increase and decrease in prices, unemployment, output, and world trade (Kumar, n.d.). References Hubbard, R. & O’Brien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall. Kumar, N.P., (n.d.). Introduction To Economics [PowerPoint slides]. Retrieved from http://www.slideshare.net/naresh83/introduction-to-economics-presentation-674534. Mankiw, G. (2007). Principles of Economics. Available from http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl'fid=M20b&product_isbn_issn=0324224729&discipline_number=413&s_cid=null.