Economic Decision Making
- Submitted by: dkhosley
- Views: 1359
- Category: Politics: Economics
- Date Submitted: 04/17/2010 03:49 PM
- Pages: 3
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The Principles
According to Mankiw (2007) there are four principles of individual decision. The first is people face trade-offs. I believe this holds true in life. To attain something you like, you may have to give up something in return. I use this principle daily.- I will ask one of my coworkers to pick up lunch for us but I pay the bill. This trade off works so I can continue work without a disruption and eat lunch in exchange for a small cost. The second principle is the cost of something is what you give up to get it. We will take something as simple as a gallon of milk. Many people will gladly give up capital (cash) for milk without giving it a second thought. The cash that is used in exchange for purchasing milk is what is given up. The third principle is rational people think at the margin. I work in the hospitality industry and can relate this principle selling rooms. People may book a room at $189 a night weeks out, but as the date gets closer and the hotel is not full, the price may decrease to $119 a night. The hotel is here with doors open no matter if we sell rooms or not. The fourth principle is people respond to incentives. I believe this is the most powerful of the individual decision making principles. The downside is the incentive has to be worthwhile in the eyes of the person receiving it. If someone is asked to come to work on a day off and offered free lunch on top of a days wages he or she needs to decide if that is a worthwhile incentive. On the other hand, if someone is asked to come in on a day off and are told the pay will be double, I believe the bigger incentive trumps the first one and is definitely worthwhile.
The Decision
I recently made a decision to have Lasik surgery done after 30 plus years of wearing glasses. Wearing and having corrective lenses has been an inconvenience. Glasses break, get misplaced, and prohibit some activities that one may enjoy. Wearing a headband in my hair is uncomfortable...
According to Mankiw (2007) there are four principles of individual decision. The first is people face trade-offs. I believe this holds true in life. To attain something you like, you may have to give up something in return. I use this principle daily.- I will ask one of my coworkers to pick up lunch for us but I pay the bill. This trade off works so I can continue work without a disruption and eat lunch in exchange for a small cost. The second principle is the cost of something is what you give up to get it. We will take something as simple as a gallon of milk. Many people will gladly give up capital (cash) for milk without giving it a second thought. The cash that is used in exchange for purchasing milk is what is given up. The third principle is rational people think at the margin. I work in the hospitality industry and can relate this principle selling rooms. People may book a room at $189 a night weeks out, but as the date gets closer and the hotel is not full, the price may decrease to $119 a night. The hotel is here with doors open no matter if we sell rooms or not. The fourth principle is people respond to incentives. I believe this is the most powerful of the individual decision making principles. The downside is the incentive has to be worthwhile in the eyes of the person receiving it. If someone is asked to come to work on a day off and offered free lunch on top of a days wages he or she needs to decide if that is a worthwhile incentive. On the other hand, if someone is asked to come in on a day off and are told the pay will be double, I believe the bigger incentive trumps the first one and is definitely worthwhile.
The Decision
I recently made a decision to have Lasik surgery done after 30 plus years of wearing glasses. Wearing and having corrective lenses has been an inconvenience. Glasses break, get misplaced, and prohibit some activities that one may enjoy. Wearing a headband in my hair is uncomfortable...