How People Make Economic Decisions Paper

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Week 1 How People Make Economic Decisions Paper

How People Make Economic Decisions Paper

The science of economics consists of constantly analyzing the choices which consumers and producers make when deciding how to use the limited resources available to society with the objective of achieving their goals (Hubbard & O’Brien, 2010, p. 4). This constant analysis is important for society because of scarcity, which basically means that unfortunately the resources available to people are not infinite so it is in everyone’s best interest that these limited resources are used in the most efficient way possible. What economics does is provide a mean to measure how efficient individual consumers, private organizations and government agencies are at using these valuable resources in pursuit of their individual goals. This paper will look to illustrate the three main assumptions behind the science of economics which explain how people make their economic decisions. The principles to be discussed are: people are rational, people respond to economic incentives, and that optimal decisions are made at the margin.

When economists say that they assume that people are rational, they are not making the statement that all people always make the right decisions that is best for them or that they know everything there is to know about said decision. They are saying that they believe consumers and private and public entities make their decisions after using all available information to them and analyzing what the costs and benefits of these decisions will be. Since a rational person should always weigh the costs and benefits of their decisions and act according to what should result more beneficial, economists like to assume that people in general are and act rationally as far as economics is concerned. For example, from an economist’s point of view when someone thinks about purchasing some product they will first use the information available to them of how much money...
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