Economic Decision Making

Essay by tbutler201University, Bachelor'sA+, October 2009

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We are faced with economic decisions every day. Whether consciously or subconsciously there is a thought process involved in our decisions and how it affects us. We look for alternatives and we gauge what the marginal benefits would be if certain decisions are made. Economic decisions are made by both young and old alike. A ten year old girl will weigh the benefits of using a portion of her $10 a month allowance to purchase a $4.99 bottle of nail polish. An adult single mom on a fixed income will consider the benefits both long and short terms of taking the kids to the movies. Decisions will be made however the decision making process will be based on each person's individual decision making style.

There are four basic principles of individual decision making. According to "Principles of Economics" (2007) these four basic principles are:1. People face trade-offs2. The cost of something is what you give up to get it3.

Rational people think at the margin4. People respond to incentivesThe first principle "people face trade-offs simply means that in order to acquire one thing you typically have to give up another. The second principle means that in acquiring something what have you lost in obtaining it? In purchasing that new handbag, not only have you lost that $300 but maybe you lost the interest from that money had you placed that $300 in an interest bearing account. The third principle states that rational people will only act if the marginal benefits exceed the marginal cost. The fourth principle states that people will be more likely to make a purchase based on the incentives that come with it. They will compare the benefits to the costs. A person may be more inclined to go with a particular car brand if...