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How People Make Economic Decisions Essay

937 words - 4 pages

How People Make Economic Decisions
Francisca A. Castellanos
January 18, 2011
Evanthis (Pete) Mavrokordatos

How People Make Economic Decisions
Decisions, decisions, decisions…Decisions are the worst, and yet we must make them each and every day. The ten principles of economics explains how people make decisions, how people interact, and how the economy as a whole works. Economics is a behavioral science, which studies how societies manage their scarce resources (Hubbard-O’Brien, Glossary). Societies have different economic interactions that are affected by the type of economic system present. The main attributes of each system are as follows. In a market economy decisions of ...view middle of the document...

Most of the time I take the first option available to me even if I know it may not be the best one.
Principle Two: The cost of something is what you give up to get it.
Costs and benefits are alternative courses of action and opportunity costs are the things one must look at when making decisions because opportunity costs are whatever one gives up to obtain something else (Tomlinson Reviews).
Principle Three: Rational people think at the margin.
I always felt I was a rational person until I began this course. Rational people systematically and purposefully do the best they can to achieve their goals (Tomlinson Reviews). Rational people often make decisions by comparing marginal benefits to marginal costs. A marginal benefit is the additional benefit to a consumer from consuming one more unit of a good or service (Glossary). A marginal cost is the additional cost to a firm of producing one more unit of a good or service (Glossary). A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost (Mankiw, pg. 4). I feel I am the complete opposite of this definition. I rule my decisions with my heart not my head and this tends to lead down a path of great regret. Can you say, “Impulse shopper”, “Buyer’s remorse” these are only a few terms to describe the way in which I tend to make decisions.
Principle Four: People respond to incentives.
This is definitely one of the ways in which I make decisions. Incentives induce people to act. Sales tend to drive me to buy even when I may not need the product. The influence of prices on the behavior of consumers and producers is crucial for how a market economy allocates scarce resources. If the policy changes incentives; it will cause people to alter their behavior (Mankiw, pg. 5).
An example of a decision I made in...

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