How People Make Economic Decisions


How People Make Decisions
Anna Moess
University of Phoenix
Basil Al-Hashimi
September 13, 2010

How People Make Decisions
Making decisions is a part of every day life. We make decisions without even thinking about them; we go from something as simple as choosing which sweater to wear, to which route to use on our way to work, to deciding if we want to take the next step in our relationship or job in a matter of minutes. We make personal decisions as well as economic decisions. We decide if we want to take our lunch to work, or if we will pay for lunch, we decide if we drink the office coffee or buy a cup on our way in. Those are small decisions that we make in seconds, while we think and debate about bigger decisions for a while. However, the question is, what influences our decisions. This paper will discuss the three economic ideas related to individual decisions, and the author will give a personal example of a decision, what the marginal costs and benefits were, and what incentives could have changed that decision. Additionally, I will explain how the principles of economics affect decision-making, interaction, and the workings of the economy as a whole.
The three economic ideas related to individual decisions are: people are rational, people respond to economic incentives, and optimal decisions are made at the margin. Economists assume that buyers and sellers use all the information available to them to achieve their goals. Rational individuals weigh the benefits and costs of their actions, and only chose the action if the benefits outweigh the costs. Economists also point out that buyers and sellers consistently respond to economic incentives, which has been proven in late history with the cash-for-clunkers incentives, and the $5000 tax refund for homebuyers. Additionally, economists reason that the ideal decision is made when any activity is continued up to the point where the marginal benefits...