How People Make Economic Decisions

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How People Make Economic Decisions
Linda Tate
January 17, 2013
Hib Shelton

How People Make Economic Decisions
Economics is the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources (Hubbard and O’Brien 2013). The decisions people make, and their interactions with others make up the economy. For people to attain his or her goals, they must make choices, and some time the resources to fulfill these goals are limited. Individual decision making reflects four principles: People make tradeoffs; because some things are scarce and not enough to meet demand. Society must decide how to limit resources and how to distribute them among consumers, which means to have one thing a person likes he or she must give up another thing they like. The next principle: when a person chooses one thing, he or she must give up something else. This principle is the decision a person has to make prior to a purchase. He or she must decide whether the dollar intended to be spent can or cannot be used on another necessity. Next: rational people think at the margin; a person’s rational willingness to purchase something is on the marginal benefit the purchase will bring to the person. Finally people respond to incentives; retailers often use incentives to get consumers to spend money, encouraging them to spend now, is to save, and earn rewards later. There are three basic economic ideas that rationalize how people make decisions, and they are; people are rational, people respond to economic incentives, and optimal decisions are made at the margin (Hubbard and O’Brien 2013). Economists believes that people as well as firms uses the information they can to obtain their goal, they weigh the costs and benefits and chooses the action or benefit that out weighs the cost. Different motives cause people to act on economic incentives; envy, compassion, and religious belief are a few of these...
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