How People Make Economic Decisions
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- Date Submitted: 09/21/2010 12:06 AM
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How People Make Economic Decisions
How People Make Economic Decisions
Today’s consumer has unlimited choices of how to spend their money. The amount of goods and services being offered is astounding. Economists commonly assume that people interact in markets and make choices according to three important ideas: “people are rational; people respond to economic incentives; and optimal decisions are made at the margin” (Hubbard & O'Brien, 2010, p.4). The purchasing power of the consumer is affected by the price of goods. The price of these goods and services is determined by supply and demand.
Consumers change the quantity of products being purchased according to the price of the products. As prices increase, consumers buy less of the product. As prices decline, consumers purchase more of the product. This concept is illustrated in a demand curve. A demand curve is a “curve that shows the relationship between the price of a product and the quantity of the product demanded” (Hubbard & O'Brien, 2010, p. 66).
The quantity supplied of goods and services is also dependent on the price. As the price decreases, the profitability of the good decreases, thus decreasing the quantity supplied. This concept is illustrated in a supply curve. “A supply curve shows the relationship between the price of a product and the quantity of the product supplied” (Hubbard & O'Brien, 2010, p.74).
Recently, I purchased a steam cleaner for my carpets. Being the new owner of a puppy, I had to make steam cleaning my carpets a weekly chore. I considered the option of hiring a company to come in and clean my carpets, but the expense outweighed the convenience. The utility derived from this purchase was the ability to have my carpets cleaned any time I wanted to without the additional expense. I made my purchase based on the price of the product. If any of the companies would have offered rebates to make their product more affordable, I would have made a different...
How People Make Economic Decisions
Today’s consumer has unlimited choices of how to spend their money. The amount of goods and services being offered is astounding. Economists commonly assume that people interact in markets and make choices according to three important ideas: “people are rational; people respond to economic incentives; and optimal decisions are made at the margin” (Hubbard & O'Brien, 2010, p.4). The purchasing power of the consumer is affected by the price of goods. The price of these goods and services is determined by supply and demand.
Consumers change the quantity of products being purchased according to the price of the products. As prices increase, consumers buy less of the product. As prices decline, consumers purchase more of the product. This concept is illustrated in a demand curve. A demand curve is a “curve that shows the relationship between the price of a product and the quantity of the product demanded” (Hubbard & O'Brien, 2010, p. 66).
The quantity supplied of goods and services is also dependent on the price. As the price decreases, the profitability of the good decreases, thus decreasing the quantity supplied. This concept is illustrated in a supply curve. “A supply curve shows the relationship between the price of a product and the quantity of the product supplied” (Hubbard & O'Brien, 2010, p.74).
Recently, I purchased a steam cleaner for my carpets. Being the new owner of a puppy, I had to make steam cleaning my carpets a weekly chore. I considered the option of hiring a company to come in and clean my carpets, but the expense outweighed the convenience. The utility derived from this purchase was the ability to have my carpets cleaned any time I wanted to without the additional expense. I made my purchase based on the price of the product. If any of the companies would have offered rebates to make their product more affordable, I would have made a different...