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How People Make Economic Decisions?

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    People make economic decisions daily by deciding how much of all things available they will buy and what prices they are willing to pay for the resource or services. Through individual decision-making of people regarding supply demands for their needs and wants, it is businesses who decide what and how many goods are to be sold, and at what prices to sell to consumers.

    In this paper I will list and briefly explain the four principles of individual decision-making; provide an example of a decision in which marginal benefits and marginal costs associated with that decision are compared, and then what marginal benefits and marginal costs were associated in decision making. I will also explore what incentives could have led to making a different decision and explain how the principles of economics affect decision-making, interaction, and the workings of the economy.

    What people are willing to pay for a resource or service can be measured and the change in the amount of goods and services demanded is elastic or variable depending on the price they are willing to pay” (Randall, 2010, Para 4) This is important because it provides the key to understanding how prices work and why people are willing to pay almost any price increase for some goods and almost no price increase for other goods.

    To understand better what people are willing to pay there are four principles in economics of individual decision-making: people face tradeoffs, people are rational, people respond to incentives, and the cost of opportunity decisions are made at the margin. People face tradeoffs involves consumers and firms using all available information as they act to achieve their goals. According to R. Glenn Hubbard and Anthony P. O’Brien, (2010) People are “rational as to individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs” (p. )

    People respond to incentives in the effect that economists emphasize “consumers and firms consistently respond to economic incentives” (Para 3) Last, the cost of opportunity decisions made at the margin, is where people act from a variety of motives, including punishment, religious belief, envy, compassion, and reward, not about all or nothing decisions, but about little or less in marginal changes. Because, resources are scarce and consumers will never have all their hearts desires in wants, tough choices are made.

    The concept of cost of opportunity means that each time people make a choice, something else in return must be let go. Most often, weighing the marginal benefits against the marginal costs is the best decision to make. A good example of a decision in which marginal benefits and marginal costs associated are compared would be deciding whether a student study by reading all assigned chapters for a better grade versus watching favorite television program. Student would weight the marginal benefits against marginal costs.

    This incentive could lead to a different decision if the marginal benefits are greater than or equal to the marginal costs if a student would continue studying. Student would continue studying until the marginal benefits are equal to the marginal costs. More studying after this would cause marginal benefits to become greater than marginal costs, and would be irrational. . Economists says, ”Rational people respond to incentives because they make decisions by comparing costs and benefits” (Hubbard, 2010, Para 3) in reply to gas prices, types of automobiles sold, higher cigarettes taxes, continuing education to obtain better job pay, etc.

    Therefore, the principles of economics affect decision-making, interaction, and the workings of the economy in that it determines what products to manufacture, how to manufacture how much to manufacture, and who receive them. In economics these decisions are end result from interactions of many people and businesses to promote a general economic well being. Interactions of consumers and sellers determine the prices of goods. Prices reflect the goods value to consumers and the costs of producing goods. Prices determine consumers and businesses to make decisions that maximize the workings of the economy.


    1. Hubbard, R. G. , O’Brien, A. P. (2010). Economics. Third Edition, P. 6. Prentice Hall. Pearson Education, Inc. Retrieved June 29, 2010 from University of Phoenix eBook Collections.
    2. Randall, J. (2010) UNDERSTANDING THE FUNDAMENTALS OF ECONMICS. Week 1 Lecture. ECO/212 Economics Course. University of Phoenix Online. Retrieved June 29, 2010 from University of Phoenix ECO/212 lecture notes.

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