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Economic Decision Making Essay

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 O’Brien, 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 original costs and marginal benefits balance out.

The individual may have spent a bit extra for a meal, but

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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 opportunity costs. “Opportunity costs are the highest value d alternative given up in order to engage in an act,” (Hubbard, G. And O’Brien, A. , 2010).

A person who chooses to leave a stressful high paying Job for one hat has less stress and less pay incurs the opportunity cost of the missed salary. Unlike opportunity costs marginal costs do not have to be the highest valued alternative. Marginal costs and marginal benefits are not restricted to finances and can come in the form of enjoyment or disappointment. For example, when I purchased a new Jeep Liberty, the marginal costs associated with the decision were fuel efficiency, cost of additional gas, additional maintenance and affordability.

The marginal benefits associated with the decision were four wheel drive, no digging out f snow in winter, incentives, and being able to step up into vehicle instead of If not for the incentives of zero percent financing and getting an stooping. Affordable price, the Jeep would have not been purchased. Even with the four wheel drive and not having to worry about hurting my back, those marginal benefits were not enough. I was willing to deal wit n the additional costs but they were not equal to the marginal benefits without the incentives.

Having the incentives did influence the decision making process. The principles of economics affect decision making, interaction and the workings of the economy as a whole because the consumer dictates the economy. Consumers control supply and demand. When consumers decide to purchase a product, they affect if more of the product will be made, how it will be made and who will it be made for, (Hubbard, G. And O’Brien, A. , 2010). Economics 4 Those questions show how the consumer decisions interact with companies and how that product consumption or rejection can impact the economy.

Finally, the four reminisces of economics when applied to individual decision making, reflect the resources, the needs, and wants of the consumer. Consumers are the back bone of a market economy and their decisions decide what is needed and how much of it. Companies take their cues from the consumer and the economy thrives or falls on the decisions of consumers. Economic 5 (Hubbard, G. And O’Brien, A. , 2010). Economics: Chapter 1 . Third Edition. Published by Hall. Copyright 2010 by Pearson Education, Inc. Accessed September Prentice 14, 2010 from Source at the University of Phoenix.

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