How People Make Economic Decisions
According to Mankiw, the four principles of individual decision-making are: “People Face Trade-offs, The Cost of Something Is What You Give Up to Get It, Rational People Think at the Margin, and People Respond to Incentives:” People face trade-offs by having to give up something to get what they want or need. This is no surprise for most people who learn early in life that few things are free. As an example of a trade-off, many times college students give up spending time with their families in order to do homework and accomplish their long-term goal of earning a degree. Because of “trade-offs, making decisions require comparing the costs and benefits of alternative courses of action” (Mankiw, 2007, p. 6). Next, rational people think at margin. A rational decision maker “takes an action if and only if the marginal benefit of the action exceeds the marginal cost” (Mankiw, 2007, p. 7). An example of a decision comparing the marginal benefit and the marginal cost associated with that decision occurred when I decided to purchase a marked-up, last minute airline ticket to pick-up my granddaughter. My other choices were to either drive my car or wait 7 days to pay a much lower airline fee. The marginal benefits of less travel time, decreased days off work, our comfort and having my granddaughter home immediately all outweighed the marginal cost of the increased airline fee. Therefore, I based my decision on these personal incentives. Of course, if the airline fee had been significantly higher than traveling by car, I had more vacation time at work and someone to assist me while traveling with my 4 month old granddaughter; I would have chosen to drive my car to reduce the cost. Finally, the principles of economics affect decision-making, interaction, and the workings of the economy as a whole because all people make decisions based on what they want and is best for them personally. People sell and...
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