How People Make Economic Decisions
Jane Doe
ECO/212
March 25, 2013
Eugene Gotwalt
How People Make Economic Decisions
The history of economic decision making drills right down to one universal fundamental element; that element is choice. People must make decisions in regards to just about everything they do to sustain life in a world where resources are limited and even scarce in some aspects (Hubbard & O'Brien, 2013). Recent developments in our economy have heightened the need for deeper study of individual decision making in an economy that is fluctuating in recovery. The purpose of this paper is to discuss how people make economic decisions.
Although not all people make rational decisions even with the proper guidance and information, current economic state dictates individual decision making simply because people generally have a natural instinct within them to survive. Economists also assume that people are rational so they will make decisions that will improve their quality of life (Hubbard & O'Brien, 2013). A good example of this would be automobile pricing. If a car dealership charges a price of $20,000 for a fuel efficient vehicle, economists assume that the leaders at the dealership have estimated that this price will earn them the most profit. The leaders could very well be wrong and perhaps a price of $23,000 would be even more profitable. However, economists assume that the decision makers at the dealership have acted rationally based on the information provided to them to make the decision to choose the $20,000 price point.
The principles of individual decision making include three important ideas. The first principle states that people are rational. The second states that people typically respond to economic incentives and the third purports optimal decisions are made at the margin. An example of a decision in which I compared the marginal benefits and the marginal costs associated with my decision was in purchasing my...