Applying Economics to Decision Making

Applying Economics to Decision Making

When thinking in economic terms while making decisions, a new behavior is realized. According to Chapter 1 in the book Principles of Economics (Mankiw, 2007), “…the behavior of an economy reflects the behavior of the individuals who make up the economy,” (p. 49) In order to understand this better, this paper will explore the four principles of economics, including marginal costs, benefits and incentives.

The Four Principals

Principal 1 – Trade-Offs

A person can spend his or her entire day today with family, or he or she can spend the morning with family and the afternoon doing schoolwork.

By choosing to spend the morning with the family and the afternoon doing schoolwork, he or she has applied the principal of trade-off. By spending some time doing schoolwork, he or she will be giving up some time to spend with the family. Their scarce resource in this example is time, which must be best used by efficiently spreading it out to get the most equity to satisfy two needs: time with school and time with the family.

Principal 2 – Getting Something Means Giving Something Else Up

By spreading time out in the above example, a person is sacrificing either additional time with the family, or additional time doing schoolwork. This sacrificed time is the opportunity cost of making the decision to spread efficiently the time between family and school. The need to satisfy two situations means giving up the ability to spend timely solely on one situation.

Principal 3 – People Thinking At the Margin Are Rational

According to Chapter 1 in the book Principles of Economics (Mankiw, 2007), “Rational people systematically and purposefully do the best they can to achieve their objectives, given opportunities they have.” (p. 51). In order to achieve these objectives in a rational way, an individual must think at the margin by comparing the benefits and costs of an objective. A rational person will chose an objective whose benefit...