How People Make Economic Decisions Paper Essay

How People Make Economic Decisions Paper University of Phoenix Eco 212 May 29, 2011 Economics plays a role in every person’s day-to-day life. One aspect that it plays apart in is decision making. For every decision that is made economics is applied. There are principles that relate to decision making. First is that for every decision made there are tradeoffs, to get one thing something else is given up. The next principle is for every decision made there is a cost. The cost is what was given up. The third principle is people think rationally and rational people think on the margin, meaning that the decision is not made unless the marginal benefit exceeds the marginal cost. The final principle is that people respond to incentives. Behavior changes when cost or benefits change. These principles explain how the economy functions as a whole. Since resources are scarce people have to make decisions based on benefiting themselves on how to spend their time and money. To make rational decisions people must interact with the environment and other decision makers. These interactions lead to the best allocation of resources. When people interact with one another they make trade for resources when the benefit is mutual. For example buying a soda the buyer is thirsty and enjoys soda so he or she will benefit from the soda, and the vender will benefit from the money for the soda so the trade has been made. These interactions are affected by the economy system present. In a centrally planned economy central authorities make decisions for what would be the best use of their goods and resources. The state can set prices of goods and determine how much to produce. Therefore, decisions are not voluntary. Decisions are voluntary in a market economy where the pricing of goods and services are guided solely by the interactions of a country’s citizens and businesses. In a mixed economy system where there is a variety of public and private control decisions are voluntary as well. No matter what economic system is present for a decision to be made the marginal benefit must out way the cost. To fully understand how the decision making process works the writer of this paper will provide an example. The decision is rather she should take the assistant manager position offered to her or not. Her first choice was to decline the offer but she began to think about the marginal benefits. The benefits would be a raise in pay, a step up in the career ladder and new learning experiences . The advancement would be a step towards her goal of becoming a human resources manager for Applebee’s. Also she would gain closer relations with corporate managers. Next she had to weigh the benefits against the cost. The marginal cost in accepting the position would be more responsibility, and it would be mandatory to work longer hours. For her the marginal benefit was greater than the marginal cost so she decided to take the position. If the circumstances were different her marginal benefits and marginal cost would have changed leading to a different choice. For example, season at her restaurant is out so money on tips has decreased. If the restaurant was still in season and tips had not decreased then there would not have been a pay raise so that benefit would have been eliminated. Another factor was she wanted one managerial shift a week if her boss had not agreed to that then she would not have taken the offer, either. Many people are not aware that when they make a decision rather it be to take the day off work or buy a house they are applying economics. Even the simple transaction of buying a soda is a part of economics. It can be concluded from this example and the facts provided that economics is implemented in day-to-day life. Reference Hubbard, R. , & O’Brien, A. (2010). Economics. The University if Phoenix eBook Collection database.