How_People_Make_Economic_Decisions

There are principles that play a major role in decision making that have a cause and effect: I will illustrate four theories that play a strategic role in their pronouncement. The assessment among marginal benefits and their associated costs have a major impact on the conclusion of their counter effect. Some trends that I have encountered in my previous decision-making have evolved to a higher level of sophistication; my decision-making has now become more gratifying with cautious optimism. The following are the four principles of individual decision making: 1. People make tradeoffs: Economic goods and services are limited, while the need to use services of these goods and services seem limitless. ( Hubbard & O’Brian, 2010). For instance, to get one thing that we like, we usually have to give up another thing that we also like. 2. When people choose one thing they give something else: People must always consider how to spend their own limited incomes because resources are limited to satisfy their unlimited needs and wants. ( Hubbard & O’Brian, 2010). For instance, when we give up an item, we lose the benefits of its services to us or incur costs to obtain the benefits of the thing we decided to choose. Thus, making decision requires comparing the costs and benefits of alternative courses of action. 3. Rational people think at the margin: In some situations, decisions in life are made in small increments or detrimental adjustments to the existing plan of action. Economics call these marginal changes. ( Hubbard & O’Brian, 2010). For instance, my daughter is pondering whether she should add one more course to the next semester in her taut schedule. As a rational decision-maker she will add the extra course as long as her marginal benefits from carrying one more course exceeds her expected marginal costs. 4. People respond to incentive: Since individuals make decisions by comparing cost or benefits, their behavior may change when the costs or benefits change. ( Hubbard & O’Brian, 2010). For instance, getting a bonus at the end of the year will impact the employees with more motivation and synergy for the following year. Companies will have to operate more strategically with lower operating incomes to produce a surplus of excess cash flow in order to provide a bonus to their employees. I recently decided to invest in perilous venture that had great risks involved. The outcome turned out to be immense and had become one of the best decisions I had ever made in my life. Purchasing an investment home turned out to be a success. The marginal benefit of paying back a 401K loan increases equity and long term foundation towards my future retirement. On this latest decision the marginal cost impacted a surplus of income in a short matter of time. The decision to purchase a home for investment during a market turndown turned out to be a triumph with definite equity gains. | Reference Hubbard, R.G., & O’Brian, A.P. (2010) Economics (3rd Ed.). Pearson Education Inc.