Economic Decisions

How People Make Economic Decisions

Nicole Smiley

University of Phoenix

How People Make Economic Decisions

Economic decision making follows four of the ten principles of economics. These four principles are: 1. people face trade-offs, 2. the cost of something is what you give up to get it, 3. rational people think at the margin, and 4. people respond to incentives. These four principles are how people make decisions.

The first principle, people face trade-offs, means nothing comes free there is a cost for everything. People value products and services based on the costs. The second principle, the cost of something is what you give up to get it, means exactly as the principle says in order to obtain an item you pay the cost to get it. The third principle, rational people think at the margin, means people think and make decisions that will make them happy. Rational people make decisions by comparing marginal benefits and marginal costs (Mankiw, 2007). The fourth principle, people respond to incentives, means people act when there is a benefit, the benefit is the incentive. People respond to incentives which induce a person to act (Mankiw, 2007).

A decision a while back I had to make was whether to accept a job that was far away from where I lived, but paid better than my previous job. I did not take the job, because of the marginal costs if I did take the job. The marginal benefits were better wages, more working hours to get paid for, and I would have a job again after being without one for so long. The marginal costs were the distance from my home, cost of gas to travel that far, the long hours, could not work when I wanted had to work when manager scheduled me, and little time for school. Though the pay was good and more hours in the end I would have had little to show for it because of the cost of gas and distance to drive. Some incentives that would have lead me to make a different decision would have been if I could have worked when I...