Economic Decisions

How People Make Economic Decisions

Economics is defined as the study of how people control their limited resources. Choices and decisions are made regarding what to purchase versus what not to purchase. There are four principles that make up one’s decision making process. These factors play a major role when one chooses to do or buy something.

The four principles are as follows: People Face Trade-Offs, The Cost of Something is What You Give up to get it, Rational People Think at the Margin, and People Respond to Incentives. The principle known as People Face Trade-Offs basically states that in order to gain one thing, one usually gives up another. Because people face trade-offs, making decisions requires comparing the costs and benefits of alternate courses of action (Mankiw, 2007). The Cost of Something is what you Give up to get it indicates that the cost of whatever you do not choose, is the price of what you give up. Price is the monetary value of a good or service for sale (Price, 2000). The principle Rational People Think at the Margin explains that a person chooses one thing over the other only if the benefit outweighs the cost. The last principle, People Respond to Incentives, says that it is easier for one to purchase something or take action when they are rewarded with some sort of benefit for doing so.

A personal example of when I compared the benefits and costs of a major decision is when I chose to stop attending college and accept a job offer. I knew that I was unsure of what I truly wanted to do with my future and therefore felt as if I was wasting time and money by continuing to go to classes. It made sense to stop taking out school loans so that I would not end up with a degree that I did not actually want or could use. By accepting a job, I could earn more money and save and also have health insurance and benefits. While working I could then figure out what I wanted to do with my future and then return to college. I may have been able to...