How People Make Economic Decisions

How People Make Economic Decisions

Devan Hairston

Principles of Economics 212

October 19, 2010

Dr. Jong Yi

How People Make Economic Decisions

No matter who you are there are always decisions to be made, whether it is a toddler trying to decide what toy to play with or a high school student deciding on what to eat for lunch. Making economic decisions is a part of every day life. There are three key economic ideas related to individual decisions. The first one is, people are rational, next is people respond to economic incentives and lastly, optimal decisions are made at the margin.

As an example of a decision in which one compared the marginal benefits and the marginal cost associated with that decision is that of buying a car. Just about everywhere a person goes, transportation is needed. Many people use their own vehicle to get from point “A” to point “B.” If a person lives in an area where there are not many public transportation options, a car is a necessity. In this scenario there is a family that has to provide transportation for two children. If the car breaks down than there are only a few choices that person has to make. The choices are to get the car fixed, buy another car without payments, or buy a car with payments.

Now one must decide how much they are willing to spend, can they afford monthly payments or is the car worth getting fixed. There may be incentives for getting a car with monthly payments such as, push, pull or drag your car in and use it as a $3,000 minimum trade in. If one wants a nicer car then they may decide this is the best deal. On the other hand if one does not have the means to keep up with a monthly car payment, this deal would not work out long term.

The marginal benefits of getting a car with payments is that it will be more reliable than the old car, which means one will not have to worry about getting the children to and from school. The marginal cost however is not is ones favor because one is not able to meet the...