How People Make Economic Decisions
Economic is the management of scarce resources by a society, to begin to understand one must look first at the individual level and work out. Individual decision-making is divided into four simple principles, which feed into the group or society and create an economy. According to Mankiw (2007), the first principle of individual decision-making is people face trade-offs, defined as multiple choices and choosing one over the other. When people make a choice, they lose the opportunities the other choices could have yielded, ultimately the choice made is at the cost of the opportunities lost, and this is known as principle two. Principle number three relates to goal achievement by making incremental changes in the plan without huge disruptions to the current process in achieving the goal. Finally, principle four relates to how a positive or negative incentive affects peoples behavior both as buyers and sellers.
The first principle is that people face trade-offs. This means that a person may have to give up something to obtain something else. Time is a good example of this principle. A person can select to spend his or her time studying for an exam to ensure a good grade or spend the time developing fun with friends and face the possibility of failing the class. The second principle is the cost of something one gives up to obtain it. A person may have to give up something to obtain what one wants in the future. An example of this principle is giving up time and wages to go to school to gain education for higher pay in the future. The third principle is rational people think at the margin. Rational people are people who systematically and purposefully do the best they can to achieve their objectives. Marginal change is small incremental adjustments to a plan of action, so margin means edge. An example of this principle is a cruise line charged $1300 for a cabin on this ship yet the closer the time gets to boarding the ship the cruise line has not met the objective of acquire enough people to fill the ship. The line may choose to offer the cabins at a discounted price rather than sail off with the ship being half full of customers.
The fourth principle is people respond to incentives. An incentive is something that induces a person to act, such as the prospect of a punishment or a reward. Mankiw (2007) stated “incentives play a central role in the study of economics…” Finally principle number four is people respond to incentives, which induce a person to act. When an individual decide to make a purchase, then is using the Marginal Benefit (MB) versus the Marginal Cost (MC). Though economist insists that Marginal Cost should be equal to Marginal Benefit, I prefer Marginal Benefit to be greater the Marginal Cost. This is subjective.
The soundest decisions are made when one makes an informed decision and a money-saving decision is no different. Just about every decision has its economic aspect, sometimes not so obvious. Persons use various principles and rules when working with financial matters. Typically we use the four principles of decision-making whether it is subconsciously or not, we use these four principles.
Comparing the marginal benefits and the marginal costs associated with a decision. The decision to lose weight was easy; however, the means to the goal was uncertain. With limited spare time to add in exercise and meal preparation, re-evaluating and adjusting current activities was the only option. The adjustment was to switch from purchasing lunch and eating with coworkers to preparing lunch at home and bringing lunch to work. The marginal costs is time spent on additional activities, such as extra time spent at the grocery store shopping for additional items, time spent for daily meal preparation for lunch and dinner. Other marginal costs can include additional food waste for food not consumed before expiration date or missed face time with coworkers to build relationships.
In additional to the marginal costs, marginal benefits for health increase. Time spent sitting at a restaurant to eat can be spent walking for a half hour at lunch and generally healthier foods are consumed with meal preparation.
The study of economics can be useful to develop just about any determination. Forecasting business deals, for example. This can be on a macro stage such as deals between states or on a micro stage such as a person purchasing a sandwich at the supermarket. In both examples, there is a common gain for both parties to trade. In the sandwich transaction, the value of a sandwich consists because a person is thirsty and likes the taste of it. The shop proprietor values the cash that he can obtain by merchandising the sandwich. Therefore, a business deal between an individual and the shop proprietor happens and the two sides result satisfied– An individual obtains the sandwich and the shop proprietor receives an income.
This also comprehends how economics can act upon interactions between individuals. Persons usually execute determinations in an attempt to develop earnings for themselves.
There will always be a variety of necessities, such as the water that persons drink, to the technologies an individual works with right now. Because all resources are scarce, individuals need to share how they prefer to surpass their time, and consequently, their earnings on resources. So these subject matters that persons must intent with their surroundings and other individuals and come to rational determinations to acquire better allocation of resources for them. This is how the economics operates as well.
As developed above, provinces made business deals and patronages with one and another because there is a bi-lateral earning for both parties to do so. On a national stage, private corporations, government, and individuals develop determinations and reciprocal actions every day on how to deal vision, imagery and how they divide their schedules and capital working with. The following illustration demonstrates this argument. Persons choose to dedicate their agendas working for large private corporations because there is a motivator bonus or incentive to do the work. The same as there is a bonus for the corporations to contract them as employees.
Authorities tax individuals and corporations for the same cause persons incline to logical determinations to develop the higher earnings for themselves. It is related to enforce benefits and deliver to make sure to get the best results at the end. It neither perfect nor moral and many individuals are left out because poverty or starvation, but societies presently have to deal with it.
References
N. Gregory Mankiw (2007), Principles of Economics (4th ed.). Mason, OH: Thomson
South-Western, a part of The Thomson Corporation.
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