How People Make Economic Decisions

Topics: Economics, Cost, Economy Pages: 3 (819 words) Published: April 27, 2011
Principles of Individual Decision-Making
Every day, people make decisions of varying degrees of importance. According to Hubbard & O’Brien, the issues discussed in economics are illustrated by a basic fact of life: that people must make choices as they try to attain their goals. Economics is the study of the choices people make to attain their goals given their scarce resources (Hubbard & O’Brien, 2010). Each individual will vary as to the outcome of their decision based on the situation, but the common denominator seems to be the principles of individual decision-making. Scholars may disagree somewhat on these principles. However, there is a consensus that includes three important principles. According to Hubbard & O’Brien, these are: 1)People are assumed to be rational.

2)People respond to economic incentives.
3)Optimal decisions are made at the margin.

Let’s look at each principle individually for a brief explanation. The first principle is that of rational behavior. People are assumed to be rational. However, this does not necessarily mean that each person given a choice will make the best decision or the right decision. It can be interpreted to mean that people usually act rationally based on the choices presented to them. Secondly, people respond to economic incentives. If it makes sense and will benefit the person, that person will respond accordingly. Again, what makes one person decide to do something over another will vary, but the principle stays the same. Lastly, people make optimal decisions at the margin. Sometimes, a decision one makes is all or nothing. Usually, it is incremental and involves a cost versus a benefit. Economists call these marginal changes and refer to additional time as marginal (Hubbard & O’Brien, 2010). For example, a person may choose to spend money on a coffee at a retail outlet or save that amount for something else. Recent Real-Life Decisions

Recently, I was faced with the decision of putting aside money...
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