How People Make Economic Decisions

How People Make Economic Decisions Paper

ECO/219

May 3, 2010

How People Make Economic Decisions

    How people make economic decisions start by using four basic individual decision-making principles.   An economy is just a group of people interacting with one another as they go through their lives. The four principles are as follows: people face trade-offs, the cost of something is what you give up to get it, rational people think at the margin, and people respond to incentives.
    Principle one where people face trade-offs means making decisions requires trading off one goal against another.   An example of this is in society where trade-offs are made between efficiency and equity.   Efficiency means that society is getting the maximum benefits from its scare resources.   Equity means that those benefits are distributed fairly among society‚Äôs members.   In other words, efficiency refers to the size of the economic pie, and equity refers to how the pie is divided.   This comes down to making the decisions as to what to give up to get something else in return.
    Principle two is the cost of something is what you give up to get it.   Making decisions requires comparing the costs and benefits of alternative courses of action.   In many cases the decision-makers have to consider both the obvious and implicit costs of their actions. For example, one would have a package of M & Ms and a Snickers candy bar, the M & Ms are seventy-five cents and the Snickers forty-five cents. When one chooses the Snickers it loses the value of gain because you are not gaining a profit.
    Principle three is rational people think at the margin.   Rational people are people who systematically and purposefully do the best they can do to achieve their objectives. Rational people know that decisions in life are rarely black and white but usually involve shades of gray.   A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal...