Economic Decisions

How People Make Economic Decisions

Tammy Davis

ECO/212

October 24, 2011

Paul Palley

How People Make Economic Decisions

From simple purchases to life changing decisions, economics play a role in a person’s day-to-day life. Decisions in personal life and in financial life follow four principles. I will discuss these four principles; provide an example of marginal benefits and the marginal costs associated with the decision, what the benefits and costs were with the decision, what incentives would have led me to make a different decision and how the principles affect decision-making, interaction and workings of the economy.

The four principles in decision-making are trade-offs, for example, trading going to the movies at the local theater and purchasing the projector television and entertainment system. Cost of what is given up; what a person is willing to give to obtain a particular goal. Such as going to school, to obtain a degree, to receive a raise, new job, or promotion. Third are rational people think at a margin. Example is a person willing to spend above a person’s original limit to purchase the vehicle with the added extras. Fourth are incentives. Individuals respond to incentives, behavior changes when cost or the benefits change, if a person will put in more work to receive the bonus.

A person faces each of these four principles when making any decision in life. With these decisions there are marginal, also known as extra, benefits, and costs. For example, I had decided after I had gotten divorced I would take my children on their first vacation ever. I decided I would take them to Disneyland. Reserving the vehicle for the vacation I had in mind exactly what I wanted to spend and what I needed to accommodate my family. Researching could find a vehicle that fit the price range but was a little small but had decent gas mileage, and another vehicle that had enough room but was out of the price range and the gas mileage was about the same. I opted...