How People Make Economic Decisions Paper

How People Make Economic Decisions

ECON 212

25 July 2010

Prof. Crump

We are all faced with economic decisions that need to be made on a regular basis and we all have different reasons about how and why we make the decisions that we make. In my paper I am going to discuss three principal ideas that individuals use when making their economic decisions. The three economic ideas are: people are rational, people respond to economic incentives, and finally, optimal decisions are made at the margin.

The economic idea that states people are rational is a notion that economists use that merely means that they assume that people are generally rational and use all available information thoroughly to base their decision, including weighing all costs and the benefits, then choosing the scenario where the benefit outweighs the cost. The second economic decision is the idea that people respond to economic incentives. This idea suggests that people generally make their decisions by looking at the scenario that is least costly in the long run and will choose the route that will cause the least amount of financial loss. The third and final idea is the notion that optimal decisions are made at the margin. This idea suggests that people base their ideas, often unconsciously by looking at the marginal benefit vs. marginal cost of the decision, which is also known as looking at the marginal analysis. For example, individuals will look at the extra cost involved in the decision and whether the additional benefit outweighs the additional cost.

I have made many decisions by comparing the marginal benefits versus the marginal costs. One in particular was last week I participated in a 205 mile bicycle ride from Seattle, WA to Portland, OR over two days. The first day of the ride I had a crash that injured my knee and Achilles tendon, however, due to the testosterone build-up and the amount of adrenaline pumping through my veins, I did not really feel the extent of the pain until...