How People Make Decisions

How people make decisions

People have to make decisions in their life every day. In order to make their decisions people must face trade-offs. Trade off is the practice of giving up one goal in order to achieve another goal. Trade-off is the first principle of economics and is one of the factors which influence people in decision making in their everyday life (Mankiw, 2009).

When we want to achieve something we must give up another goal to achieve what we want. For example, university students give up their opportunity to spend their time working in order to complete their university education. This situation of making a choice is known as trade off. Trade off is a very common thing everyone needs to face when making any type of decision, even the government needs to face trade off when it comes to making valuable economic decisions.

Recently, the Bank of England had to face an important trade off between controlling inflation and increasing investment in the British economy. Britain has managed to keep its interest rate as low as 0.5 percent for 25 consecutive months to keep the economy active. However, in achieving this goal the British government had to give up the goal of lower inflation rate. Britain’s annual inflation rate was as high as 4 percent this January (The New York Times, 2011). The government had to decide in between lower inflation and higher investment.

The cost of giving up something in order to achieve something is defined as the opportunity cost. The opportunity cost of higher investment to the British economy, therefore, is the high inflation rate. The concept of opportunity cost falls under the second principle which influences decision making.

Another good example of a trade off can be inferred from the ban on smoking in all bars and restaurants in Spain. Due to the ban on smoking the bar and restaurant owners anticipated that they could face a sharp fall in their trade of about 10 percent (BBC News, 2011). This means...