How People Make Economic Decision
In the text book, Economics: Foundation and Models, economics is defined as the study of the choices people make to attain their goals, given their scarce resources. Economists have broken down individual’s decision making into four principles. We will also explore how marginal benefits and marginal costs are associated with our decision. People’s economic interactions are also affected by different types of economic systems.
Economists have developed four principles of individual decision making. The first principle is when people face trade-offs. On this kind of decision we trade one goal for another. The second principle is opportunity cost. Here we compare the costs and benefits of alternative courses of action, in other words, what do we give up to get that item. The third principle is how people think at the margin. In life, we do not go all or nothing in our decision but we make small adjustment to our plan. For example, when I chose to go back to college, there will be some changes from my daily activities. The marginal benefit of going to college is to get a better profession and better pay, in turn have financial stability. The marginal cost of college though is spending less time with my wife and kids. The fourth principle is incentives. There are times that some decisions are made by the incentives that people give. I can remember when I first bought my house; I was looking at what incentives the builders were offering to finally make my decision. I was looking at the closing cost, how much upgrades they would give me, and what they could do for financing. Incentives encourage a person to make a decision but also different types of economic systems.
Society today has three economic systems in place. The first one is market economy. “In a market economy, the income of an individual is determined by the payments he receives for what he has to sell” (Hubbard, O'Brien, & P, 2010, p. 9). Think...