Economy Decisions Made by People

Essay by bobappleCollege, UndergraduateA, December 2009

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IntroductionThis paper will discuss microeconomics and macroeconomics as it covers topics that directly affect peoples lives including explaining the four principles of individual decision-making, providing an example of a decision in which an individual compares the marginal benefits and the marginal costs associated with a decision, what the marginal benefits and marginal costs associated with that decision were, what incentives could have led the individual to make a different decision and explaining how the principles of economics affect decision making and the economy.

Four principles of individual decision makingAccording to Mankiw, "an economy is just a group of people interacting with one another as they go about their lives. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we start our study of economics with four principles of individual decision making."The four principles of individual decision making are people face trade-offs, the cost of something is what someone gives up to get it, rational people think at the margin and, people respond to incentives.

For each decision a person makes, a trade off for another decision that could have been made takes place.

The second principle is the true cost of something someone purchases. Mankiw explains this by using an example of a student deciding to attend college. This student is not just giving up the tuition costs to attend college, but additional items including the money that could have been earned had that student chosen to work instead.

The third principle, people make rational decisions and these decisions include what is best for them. People are willing to pay for an item or service if that extra marginal benefit is beneficial to them. People will choose one item over another if that one item provides something extra that makes it worth...