How People Make Economic Decisions

Economic Decisions

ECO/212 Week 1

How People Make Economic Decisions Paper

Economic Decisions: Are They Worth It?

The four principles of Individual decision-making are trade-offs, opportunity cost, marginal benefits, and incentives (Hubbard & O’Brien, 2010). Trade-offs is defined as risking losing something in return for gaining something else. It is implied that the person making the trade-off fully comprehends what he is giving up and gaining (Hubbard & O’Brien, 2010). Opportunity cost is defined as the benefits one could have received by taking an alternative action. There are will always be choices, but choosing option that is the most beneficial in detrimental to effective decision making. Marginal benefits are defined extra amount a person is willing to pay for a product (Hubbard & O’Brien, 2010). Applied to decision making, marginal benefits are separate from incentives. Marginal benefit is the fringe benefits associated with one of the choices. Incentives are defined anything that motivates a particular course of action (Hubbard & O’Brien, 2010). Incentives are used to sway and influence decision making but may not be worthwhile after the decision is made.

A way we can relate to marginal benefit vs. cost is by buying a bag of potato chips to satisfy a craving. We can rate the satisfaction on a scale of 0-5, 0 being less satisfactory and 5 being the most satisfactory. The first few potato chips we eat will make us happy; perhaps a score of +4. We reach for the next handful and still are satisfied perhaps a +2. The next handful of chips however we start to question if we are being gluttonous or if we really are still fulfilling the craving. However, it is still satisfactory so we will give a + 1 rating.

Soon, we will come to realize that we are not gaining pleasure from the bag of chips any longer, which will give us an equal marginal cost and benefit. Since a marginal decision will only involve the next chip you'll eat, you'll weigh the...