Economic Decisions

How People Make Economic Decisions

All adults must make choices to attain specific goals. Individual decision-making involves making choices on how to use income on various goods and services available to them. Many outside entities can persuade an individual to use their resources including coupons and advertisements.

The principles of individual decision-making are: trade-offs,marginal benefits and incentives, and opportunity cost (Hubbard & O’Brien, 2010). Trade-offs is when producing more of one good or service means producing less of another good or service. Opportunity cost is the benefits one could have received by taking an alternative action. Marginal benefits are the additional satisfaction or utility that a person receives from consuming an additional unit of good or service. Incentives are anything that motivates a particular course of action. Incentives are used to sway and influence decision making but may not be worthwhile after the decision is made.

An example to show the effects of marginal benefits and marginal cost associated with a decision would be the purchase of an automobile. Some individuals find offers for used cars that are inexpensive but the car is used and has no warranty. Other individuals select a new automobile that will be paid on for a few years but there is the assurance that if something goes wrong, there is a warranty to cover it. A person debating on whether to purchase a used or new automobile could find a marginal benefit by finding a car or truck that is not too old but has an extended warranty.

The marginal benefits and marginal costs associated with the decisions of purchasing a used car with good history and low mileage could be its low cost versus the total payment for a newer automobile for a longer period of time. A different decision could be made if the government would offer incentives like it has in the past year or so by purchasing fuel efficient cars.

The three major economic systems are: centrally...