How People Make Economic Decisions

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  • Topic: Economics, Marginal concepts, Cost
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  • Published : October 25, 2010
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How people make economic decisions
Sandra Alleman
University of Phoenix
Principles of Economics
ECO 212
Jumoke Sanusi, PhD
July 18, 2010

As well Hubbard and O’Brien explain in their book, "The world is a place where there is scarcity, with unlimited needs that exceed resources available to meet those needs" (Hubbard & O’Brien, 2010, p.4). For this reason, people face daily decisions about how they will allocate their limited resources on endless options of needs. Economics studies the choices consumer, business managers and government officials make to achieve their goals with limited resources (Hubbard & O’Brien, 2010)

How people make decisions
Economics establishes three principles in the way people behave when making choices: (a) people are rational; (b) people respond to Economic incentives, (c) optimal Decisions are made at the margin People are rational

Economists assume that people and companies are rational in choosing what to consume. This principle assumes that people evaluate the benefits and costs of each action and thus only take the choice that gives them greater benefit over cost. Acting rationally doesn’t means the election will be the correct (Hubbard & O’Brien, 2010) People respond to Economic Incentives

Economists assume that people and companies constantly respond to economic incentives. An incentive is something that persuades a person to act. Rational people respond to incentives because they realize their decision-making process of comparing costs and benefits. A clear example is that some people quit smoking compared to steep increases in cigarette prices. Taxes are an example of economic policy designed to affect the incentives of the people (Pitta Arcos, 2008) Optimal Decisions are made at the margin

A person is rational when, systematically and deliberately, does the best to achieve his or her goals. However, not all decisions are totalitarian (all or nothing), but involve marginal changes,...
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