How People Make Economic Decisions

How People Make Economic Decisions
Jeness D Weninger
18 October 2010
Luis Bernardo Torres Ruiz

    Every day, people are faced with economic situations requiring a decision to be made, whether knowingly or subconsciously. It may be something as simple as deciding between going to the movies versus renting a DVD, or as complex as calculating how much of a product or even what type of product to produce. According to Ten Principles of Economics, there are four basic principles of individual decision making that apply to all economic choices; that people face trade-offs, that the cost of something is what you give up to get it, rational people think at the margin, and that people respond to incentives (Mankiw, 2002). These decisions are what drive the economy and the goods and services produced.
    It is a fact that people face trade-offs. Due to limited resources, other choices have to be made in regard to purchasing goods or services. Sometimes the good or service desired is not available because of scarcity and a decision must be made to either wait for the item to be produced at a later date or purchase another comparable item now. This principle works in tandem with the principle that the cost of something is what you give up to get it. If you decide to wait until a later date to get the item you genuinely wanted, then you are giving up the time waited to get it, making time the opportunity cost.
    A general conclusion made by economists is that people are rational and therefore will make rational decisions and that they will do the best they can to achieve their objectives. According to Economics, “Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs” (Hubbard & O’Brien, 2010, p. 5).
    Finally, people respond to incentives that entice them to act quickly.   This could be something as simple as a rebate on a vehicle.   It could be as elaborate as putting up...