How People Make Economic Decisions

How People Make Economic Decisions 2
Four Principals of Individual Decision Making
People Face Trade offs
  Making individual decisions requires that some type of exchange or trade off occurs. A
decision will always have an effect, or consequence. A great example would be to look at
the   situation in Iraq. The US Government has been spending substantial amounts of money
to have troops occupy Iraq, this expenditure seeps into the budget of spending and investing
to raise this country’s standard of living.
Opportunity Cost
  As we go through a decision making process, one aspect to consider is to compare the
costs and benefits associated with an alternative course of action.   A simple example is to
examine the costs and benefits of going to school. Even though the benefits of school will be
obtaining a degree and knowledge, an opportunity cost may be the time spent at school
takes away from the hours spent working and earning money.
Marginal Changes
  Rational people recognize that decisions are rarely straight forward and easy.   Economists
use the term ‘marginal changes’ to describe small incremental adjustments to an existing
plan of action (Mankiw, G, p6, Principles of Economics, 2007).
An example of this is a company that manufacturers goods. Hypothetically, workers are paid
$9 an hour to package frozen dinners. In an 8 hour shift   500 frozen dinners are packaged, if
the workers have to work overtime, the company has to pay them $3 an hour more- which is
the marginal cost for additional frozen dinners to be packaged. The marginal benefit is
increased volume, and therefore revenue.

How People Make Economic Decisions 3

  Incentives are a vital part in individual decision making. An example of how incentives
drive our decision making can be related to gas taxes and small vehicles. Amongst other
reasons, continents like Europe and Australia drive smaller cars...