Economic Decision Making
In today’s market economy consumers have difficult decisions to make when deciding how to spend their money. Due to budget constraints and limited resources, consumers must apply the four principles of economic decision making into their daily lives. These four principles are: “people are rational, people respond to economic incentives, people make optimal decisions at the margin, and trade-offs,” (Hubbard, G. and Obrien, A., 2010). The principle that people are rational implies that rational people use every resource available to them as they work on achieving their goals, (Hubbard, G. and Obrien, A., 2010). This principle also implies that rational people will look at the costs and benefits associated with their actions before they make a decision. This principle suggests that rational people think critically before making a decision, which is a good thing. The principle that people respond to economic incentives means that cost and benefits are key factors in decision making. For example, car dealers use rebates and low financing rates as incentives to encourage people to purchase cars. Just last year, the “Cash for Clunkers” program instituted by the government encouraged many people to trade in their old cars and buy new ones. The principle that people make optimum decisions at the margin means that people make decisions where the marginal cost and marginal benefit of a decision are equal. For example, a person who decides to eat out because he or she does not feel like cooking has made a decision where the marginal costs and marginal benefits balance out. The individual may have spent a bit extra for a meal, but he or she has still eaten. The principle of trade-offs implies that because of limited resources, individuals will make Economic 3
decisions that may require them to trade-off one thing for something else. This principle also involves looking at...
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