University of Phoenix, ECO/212
How People Make Economic Decisions
People make economic decisions daily by deciding how much of all things available they will buy and what prices they are willing to pay for the resource or services. Through individual decision-making of people regarding supply demands for their needs and wants, it is businesses who decide what and how many goods are to be sold, and at what prices to sell to consumers. In this paper I will list and briefly explain the four principles of individual decision-making; provide an example of a decision in which marginal benefits and marginal costs associated with that decision are compared, and then what marginal benefits and marginal costs were associated in decision making. I will also explore what incentives could have led to making a different decision and explain how the principles of economics affect decision-making, interaction, and the workings of the economy.
“What people are willing to pay for a resource or service can be measured and the change in the amount of goods and services demanded is elastic or variable depending on the price they are willing to pay” (Randall, 2010, Para 4) This is important because it provides the key to understanding how prices work and why people are willing to pay almost any price increase for some goods and almost no price increase for other goods. To understand better what people are willing to pay there are four principles in economics of individual decision-making: people face tradeoffs, people are rational, people respond to incentives, and the cost of opportunity decisions are made at the margin.
People face tradeoffs involves consumers and firms using all available information as they act to achieve their goals. According to R. Glenn Hubbard and Anthony P. O’Brien, (2010) People are “rational as to individuals weigh the benefits and costs of each action, and they choose an action only if the...