How_People_Make_Economic_Decisions

Abstract Individual decision making is based on ten principles; four of the ten principles are people face trade-offs, the cost of something is what you give up to get it, rational people think at the margin, and people respond to incentives. Purchasing a new vehicle encompasses all of these principles where one needs to compare the marginal benefits and the marginal costs. In my experience of purchasing a new car and comparing the marginal benefits with the marginal costs, I compared a Toyota Matrix and a Kia Spectra 5. Fairleigh Dickinson University How People Make Economic Decisions Individual decision making in regards to economics includes trade-offs, giving something to get what you want, rational people thinking at the margin, and people responding to incentives. People facing trade-offs requires a person to give up one thing to acquire another. The cost of giving something to get what you want involves giving something of value now to reap a long term gain. Rational people think at the margin and establish plans to accomplish specific goals while allowing the possibility for adjustment to their plan, (Mankiw, 2007). Incentives are how many rational people base their decision making. An incentive could cause a person to alter their original plan because the incentive could make more sense for their given situation. Deciding the Marginal Benefits and Costs Last year I was researching the automobile market to buy a new car. The price of oil skyrocketed and my current vehicle at the time was an SUV getting about 17-20 mpg. Earlier that year, I accepted a job that required me to drive 30 miles each way and I found myself spending a considerable amount of money on fuel. Although, fuel economy was the main motivation for purchasing a new vehicle at that time, I also took into consideration what I was willing to sacrifice to purchase the car. The budget for the new car purchase was no more than $15,000.00. The car budget and the features I was looking for had me considering the Toyota Matrix and the Kia Spectra 5. The Toyota Matrix’s cost was $15,200.00 and I could get the Kia Spectra 5 for $14,200.00. Although, I wanted the Toyota because I preferred its look and I was familiar with Toyota’s quality, but the Kia offered a seven year/100,000 mile warranty. The marginal benefits and the marginal cost that I had to consider was that I preferred the look of the Toyota more and liked its reliability record, but the cost to own it was greater. In the end, I chose the Kia because I was not willing to pay the higher price to own a car that will serve the same purpose as the less expensive car. Incentives and How the Principles of Economics Affect Decision Making If Toyota offered cash back incentives coupled with a large enough discount on an extended warranty than I may have chosen the Toyota instead. The principles of economics affect decision making in all things that people need and want. People react to the economy and apply the principles of economics which can have a major effect on interaction. The state of the economy whether good or bad can have a major effect on trade both domestically and internationally. Consumers respond to prices, incentives, and rational decision making to purchase goods. When the principles of economics are applied by consumers and sellers of goods, the inner workings of the economy as a whole are directly affected. Conclusion The Principles of economics is based on human behavior and how it affects the economy. Marginal benefits and marginal costs coupled with incentives have a direct impact on how people spend their money. These decisions have a major effect both positive and negative on the economy as a whole. The decision making of the consumer can dictate the state of the economy and how manufactures interact with consumers. This interaction can also have a major affect on the global economy as well. References Mankiw, N.G. (2007). Principles of Economics (4th ed.). Mason, OH Cengage Learning Retrieved from: http://ecampus.phoenix.edu/classroom/ic/classroom.aspx