How People Make Economic Decisions

How People Make Economic Decisions

There are four principles of individual decision-making, people facing trade-offs, the cost of something is what you give up to get, rational people think at the margins, and people respond to incentives. The principles listed above affect the economy as a whole because it is the thought process of how people spend. Making decisions in the economic world is something that numerous individuals do on a daily basis.

To begin, people face trade-offs, for instance, if an individual is in college he or she may spend more time in on particular subject. To begin lets say that the class that is being studied by the student is Anatomy and Physiology, this class is separated into two segments consisting of theory and practical, both being 2 hours of class time. The student could spend more time on studying the practical part of the course due to the fact that he or she is failing this section of the class. In the theory segment the student is passing so he or she could spend more time in practical study sessions in order to benefit in balancing their grades. The incentive gained could be that the student could pass the class and this would allow him or her to go further in their studies. How does this affect the economy? It allows more educated individuals into the world for better education.

Next, the cost of something is what you give up to get it.. In economics, cost is often viewed in the terms of the opportunity given up when a decision is made. For example, I chose to go back to college my personal trade off is that I do not have much time for anything other than work, school and family; therefore, I have traded my time for a higher education. The incentive in this decision was that I will obtain a higher education and in return have chances at better job opportunities. The incentives of a higher education do not stop with job opportunities; this writer has two young children that will be greatly influenced to get a higher education by seeing their father do the same.

Rational people think at the margin is when people make decisions to make them happy. For example, if one would prefer to have more money, they would value this against having to work more. They are comparing the marginal cost of working to the marginal benefit of additional income.

Recently I had to make a decision where I had to compare the marginal benefits and the marginal costs associated with that decision. A week and a half ago I underwent and surgical operation to repair an abdominal hernia. This is my second hernia surgery and the first left me on leave of absence from work for 6 weeks and this one will have me off from work the same length of time. The marginal benefits associated with this decision were I would have the hernia repaired to again be healthy. Hernias can sometime be strangulated; this means that oxygen can be cut off from part of the bowel killing that