Principles of Economics

Principles of Economics Page 1

The four principles of economic decision-making are: (1) people face trade-offs; (2) the cost of something is what you give up to get it; (3) rational people think at the margin; and (4) people respond to incentives. People face trade-offs when making a decision such as working longer hours to make more money will consequently reduce your time with your love ones. The decision cost of giving up something requires comparing the costs and benefits of alternative choices. Rational people think at the margin by taking an action if and only if the marginal benefit exceeds the marginal cost. People respond to incentives because they choose activities by comparing benefits to costs; therefore, a change in these benefits or costs may cause their behavior to change (Mankiw, 2004-2007).

The selling of my 2000 Honda Accord which I had recently spent $1200 in repairs and new tires. One month later, the fuel injection goes out and the extended warranty will no longer cover it based on the miles have exceeded. The cost to repair it would be $800. I decided to research my options, should I sell the car or fix it? Not to mention, I just spent $1,200 on recent repairs. The market value of the car is $7700 in excellent condition and $7100 in good condition. After a few days of outweighing the options, a new car was also something I was considering. I thought of the marginal benefits and the marginal cost. So, if I sell the Accord I will no longer worry of how will fix it, the time I will spend without a car and what other repairs will this car need in a month or even a year. A new car would only require minimal maintenance for the first two years and with

Principles of Economics Page 2

$7000 as a down payment, I convinced myself that I would find a great deal. So, I sold my Honda Accord to my neighbor for $7000 and purchased a new car. I found a 2010 Honda Civic for a reasonable price and financed the balance for...