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How People Make Economic Decisions

Dictionary. Com defines consumer decision making as “the process by which consumers identify their needs, collect information, evaluate alternatives, and make the purchase decision. These actions are determined by psychological and economical factors, and are influenced by environmental factors such as cultural, group, and social values. ” (Objectifications. Mom, 2007) Four major economic forces drive the decision a consumer makes when purchasing goods or services that are taking tradeoffs, price, margin of benefits, and incentives and are the first four reminisces in the study of economics. (Minima, 2006) The first of these is taking tradeoffs by which the consumer gives up something for something that is desired more or has a better value. If, for example, the consumer is trying to decide what kind of vehicle to buy between a sedan or a sports model that only seats two occupants.

The trade off is the number of passengers the consumer could haul in the vehicle and make the decision based on that or the fuel efficiency rating between the two vehicles. A sports car would consume less fuel because the vehicle would to be weighed down with the extra passengers than a family car but a sports model may have a

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high performance engine which needs special maintenance or premium gas. The trade off would be the speed and less passenger space.

A rational consumer would consider all the tradeoffs when deciding what make, model, and size of a vehicle to purchase as well as status and fuel efficiency. The second force in decision making by the consumer is the price or cost of the goods or services. Price plays a crucial role in the decision making process because it determines how much can be afforded to make that purchase and the value the consumer realizes from purchasing at a certain price.

It is not only the price of something that drives the decision to buy a sedan or a sports vehicle a consumer should consider the opportunity cost. An opportunity cost is the amount given up to make the purchase of an equally desired purchase. If the consumer chooses to purchase the sports model the opportunity costs would be the difference between how many passengers each vehicle could hold and the difference in the gas mileage teen the gas guzzler and the more fuel efficient vehicle. Another factor in the consumer’s decision to purchase something is margin of benefit and margin of cost.

In deciding whether to purchase the sedan or the sports model the rational consumer looks at the margin of benefit and the margin of cost for each of the vehicles. The marginal benefit of choosing the sedan is price difference and the number of passengers although the margin of cost would be the prestige and high- performance of the sports model. The marginal costs of choosing the sports model loud be the number of passengers that would be left behind and possibly the difference in fuel efficiency.

A broader scope of this model is that fuel emissions would be greater in one of the two vehicles and increasing air pollution would be a marginal cost. Finally, the fourth factor or force driving the consumer’s decision is incentive to make the purchase that plays a central role in decision making. The than the sedan whereas the incentive in purchasing the sedan would be better fuel efficiency and safer driving. Each consumer may have different incentives to insider when making a choice.

One of the types of incentive to consider when making a purchase is the moral incentive to choose the right vehicle for the environment or the right choice if purchasing the vehicle to carry more passengers reducing the amount of fuel needed while purchasing the sports model would be indecent or frivolous in some eyes. A financial incentive could contribute a large factor in the decision to buy the vehicle if one auto maker was offering a rebate of the sports car reducing the cost near the same price as the sedan.

The incentive would e to purchase the sports model and take the rebate to use for title, sales tax, and registration. Whereas a purchase without the incentive off rebate would mean that the consumer would need to give up more resources to cover the costs of the incidentals associated with purchasing a vehicle. The four forces that control the decision a consumer makes when deciding to make a purchase are plain and simple to see and have a direct impact on the economy that is Just as easily discerned.

Manufacturers study the method that consumers use when making an economic session as it is a science that is clearly defined to determine the amount of goods to produce, the resources needed to produce those goods and how to use these decision principles when marketing to the consumer. The consumer’s decision to make a purchase of a vehicle, whether it be a sedan or sports model or from one maker to another, are the decisions that drive the economy. References Objectifications. Com. (2007). Http://www. Objectifications. Com Minima, N. G. (2006). Principle of Economics, Fourth Edition (4th De. ). : South-Western Pub.

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