Economic Decisions Paper
- Submitted by: rlbenntt
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- Category: Politics: Economics
- Date Submitted: 02/13/2011 11:58 AM
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How People Make Economic Decisions
On a daily basis people make economic decisions. From buying a gallon of milk to paying their bills each transaction is an economic decision. When people make these decisions they take four principles into consideration. They are people face trade-offs, the cost of something is what you are willing to give up to get it, rational people think at the margin and people respond to incentives. Even if people do not rationally think about these principles, they are using these four thoughts before making a decision.
When people exchange money or a good, they are making a trade off because they cannot have both at the same time. They are also paying a cost for a product when the give money for a product because they were willing to give up the money for a product. If an incentive is offered such as a buy one get one free, they are willing to give up more or even purchase more to get this item. All of these examples are how individuals use the above listed four principles when making an economic decision.
In the textbook Economics, the authors point out that when economists use the word marginal, they are talking about something extra or additional (Hubbard & O'Brien, 2010 p.6). They also talk about marginal benefits and marginal costs and how people strive to have these principles equal each other. They state “Economist reason that the optimal decision to continue any activity up to the point where the marginal benefit equals the marginal cost” (Hubbard & O'Brien, 2010, p.6).
A personal example of this theory would be on a recent trip to Las Vegas, a decision was made to play blackjack. Some thought went into this decision before playing, how long would this entertainment last and how much would have to be spent playing. Weighting out all the options, a decision was made to go ahead and play. After spending a few hours at the table, a decision was made to give up the game and walk away. The marginal benefits to this...
On a daily basis people make economic decisions. From buying a gallon of milk to paying their bills each transaction is an economic decision. When people make these decisions they take four principles into consideration. They are people face trade-offs, the cost of something is what you are willing to give up to get it, rational people think at the margin and people respond to incentives. Even if people do not rationally think about these principles, they are using these four thoughts before making a decision.
When people exchange money or a good, they are making a trade off because they cannot have both at the same time. They are also paying a cost for a product when the give money for a product because they were willing to give up the money for a product. If an incentive is offered such as a buy one get one free, they are willing to give up more or even purchase more to get this item. All of these examples are how individuals use the above listed four principles when making an economic decision.
In the textbook Economics, the authors point out that when economists use the word marginal, they are talking about something extra or additional (Hubbard & O'Brien, 2010 p.6). They also talk about marginal benefits and marginal costs and how people strive to have these principles equal each other. They state “Economist reason that the optimal decision to continue any activity up to the point where the marginal benefit equals the marginal cost” (Hubbard & O'Brien, 2010, p.6).
A personal example of this theory would be on a recent trip to Las Vegas, a decision was made to play blackjack. Some thought went into this decision before playing, how long would this entertainment last and how much would have to be spent playing. Weighting out all the options, a decision was made to go ahead and play. After spending a few hours at the table, a decision was made to give up the game and walk away. The marginal benefits to this...