How_People_Make_Economic_Decisions

How People Make Economic Decisions 2 Four Principals of Individual Decision Making People Face Trade offs Making individual decisions requires that some type of exchange or trade off occurs. A decision will always have an effect, or consequence. A great example would be to look at the situation in Iraq. The US Government has been spending substantial amounts of money to have troops occupy Iraq, this expenditure seeps into the budget of spending and investing to raise this country’s standard of living. Opportunity Cost As we go through a decision making process, one aspect to consider is to compare the costs and benefits associated with an alternative course of action. A simple example is to examine the costs and benefits of going to school. Even though the benefits of school will be obtaining a degree and knowledge, an opportunity cost may be the time spent at school takes away from the hours spent working and earning money. Marginal Changes Rational people recognize that decisions are rarely straight forward and easy. Economists use the term ‘marginal changes’ to describe small incremental adjustments to an existing plan of action (Mankiw, G, p6, Principles of Economics, 2007). An example of this is a company that manufacturers goods. Hypothetically, workers are paid $9 an hour to package frozen dinners. In an 8 hour shift 500 frozen dinners are packaged, if the workers have to work overtime, the company has to pay them $3 an hour more- which is the marginal cost for additional frozen dinners to be packaged. The marginal benefit is increased volume, and therefore revenue. How People Make Economic Decisions 3 Incentive Incentives are a vital part in individual decision making. An example of how incentives drive our decision making can be related to gas taxes and small vehicles. Amongst other reasons, continents like Europe and Australia drive smaller cars because they are more fuel efficient, which is an incentive due to the high gasoline taxes in these parts of the world. Comparing Marginal Costs and Benefits in Personal Decision Making An example in which I compared marginal costs and marginal benefits is when I was deciding which University to attend. Following my research in Universities in LA and which would best meet my goals and needs, I narrowed it down to two Institutions; Pepperdine and Phoenix. Both of these Universities met my major needs and goals, however there were small differences that impacted my final decision. Obviously, my final decision was Phoenix. The marginal benefits associated with this decision included the time frame in which I could finish my degree. Although both Universities offered a program for the full time working adult, Phoenix offered an accelerated option in which I could finish even quicker. This met my goal of completing my degree as quick as possible. The marginal cost in my decision to attend Phoenix related to the lack of prestige associated with the brand name Pepperdine carries. Even though Phoenix is a legitimate University, Pepperdine is an older institution with a renowned business school, in the real world this may be taken in consideration in employment situations. How People Make Economic Decisions 4 Incentives that could have led me to make a different decision is if Pepperdine had a program in which additional classes could be taken that would enable me to finish my degree in less than 2 years. Explain how the principles of economics affect decision-making, interaction, and the workings of the economy as a whole.