How People Make Economic Desisions

How People Make Economic Decisions Paper

Robert Ausbrook Jr.

University of Phoenix

Eco/212

August 16th, 2010

Tilahun Ayanou

Human beings make economic decisions daily and anyone of those decisions has the potential to affect his or her lives for years to come. This paper will take a look at not only the key principles involved in an individual’s decision-making process but also how I used those principles in a recent decision to purchase goods.

There three key principles involved in an individual’s decision-making process. These ideas are that (1) People are rational thinkers, (2) People respond to economic incentives, and (3) Optimal decisions are made at the margin. The proper use of these principles will indeed help in achieving ones goals.

First on the list is the assumption can be made than people are, in a general sense, rational. According to Hubbard and O’Brien (2010), “This assumption does not mean that economists believe everyone knows everything or always makes the “best” decision. It means that economists assume that consumers and firms use all available information as they act to achieve their goal.” Rational thinking individuals will take a look at the costs and the benefits of a given decision and decided what to do, depending on the results of their analysis.

The second principle is that people respond favorably to economic incentives. Hubbard and O’Brien (2010) cite the example: “FBI couldn’t understand why banks didn’t want to spend $60,000 to $70,000 per bank in order to stop robberies, when the average robbery nets the crock only about $1,200.” The reason the banks did not want the extra security was that it was not a cost-effective proposition; they would spend more money than it was worth. Another example of this would be this Nation’s traffic laws. If a driver is caught speeding he or she will receive a speeding ticket. The economic incentive in this case would be not to speed.

The third principle is optimal decisions are made at...