How People Make Economic Decisions
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- Date Submitted: 09/25/2010 11:58 AM
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How People Make Economic Decisions
“Economics is the study of how society manages its scare resources” (Mankiw, 2007, p. 4). Part of studying economics is looking at behavior of the individuals who make up the economy and how they make decisions (Mankiw, 2007). According to Gregory Mankiw (2007) there are four principles of individual decision-making (p. 4). The following are the four decision-making principles:
1. People Face Trade-offs – Part of decision-making requires individuals to decide what they will give up in order to accomplish or acquire something.
2. The Cost of Something Is What You Give Up to Get It – Reviewing the cost and benefits of what is being given up in order to achieve a goal.
3. Rational People Think at the Margin – “Making decisions by comparing marginal benefits and marginal costs” (Mankiw, 2007, p. 6). Meaning to look at the losses and gains arising from a small change in variables.
4. People Respond to Incentives – A punishment or reward that makes people act.
Marginal benefits and marginal costs can be seen in every day decision-making. An example in which marginal benefits and marginal costs can be seen is in deciding whether to purchase exercise equipment when a person already has a membership to the gym. First thing to think about is what kind of benefits purchasing exercise equipment would give. Joining a gym could cost, at a minimum, $30 dollars a month, with a total of $360 dollars a year. Most contracts are at least two years which could make the total membership around $700 dollars. The assumption with joining a gym is that all equipment supplied would be used. Meaning that a member all the facility equipment to achieve a complete workout. Unfortunately, every member is different and due to the lack of privacy some would only utilize the offered equipment that they are comfortable working out on. For instance, individuals may find that they only do cardio because they are uncomfortable doing weights in a...
“Economics is the study of how society manages its scare resources” (Mankiw, 2007, p. 4). Part of studying economics is looking at behavior of the individuals who make up the economy and how they make decisions (Mankiw, 2007). According to Gregory Mankiw (2007) there are four principles of individual decision-making (p. 4). The following are the four decision-making principles:
1. People Face Trade-offs – Part of decision-making requires individuals to decide what they will give up in order to accomplish or acquire something.
2. The Cost of Something Is What You Give Up to Get It – Reviewing the cost and benefits of what is being given up in order to achieve a goal.
3. Rational People Think at the Margin – “Making decisions by comparing marginal benefits and marginal costs” (Mankiw, 2007, p. 6). Meaning to look at the losses and gains arising from a small change in variables.
4. People Respond to Incentives – A punishment or reward that makes people act.
Marginal benefits and marginal costs can be seen in every day decision-making. An example in which marginal benefits and marginal costs can be seen is in deciding whether to purchase exercise equipment when a person already has a membership to the gym. First thing to think about is what kind of benefits purchasing exercise equipment would give. Joining a gym could cost, at a minimum, $30 dollars a month, with a total of $360 dollars a year. Most contracts are at least two years which could make the total membership around $700 dollars. The assumption with joining a gym is that all equipment supplied would be used. Meaning that a member all the facility equipment to achieve a complete workout. Unfortunately, every member is different and due to the lack of privacy some would only utilize the offered equipment that they are comfortable working out on. For instance, individuals may find that they only do cardio because they are uncomfortable doing weights in a...