University of Phoenix
May 29, 2011
Economics plays a role in every person’s day-to-day life. One aspect that it plays apart in is decision making. For every decision that is made economics is applied. There are principles that relate to decision making. First is that for every decision made there are tradeoffs, to get one thing something else is given up. The next principle is for every decision made there is a cost. The cost is what was given up. The third principle is people think rationally and rational people think on the margin, meaning that the decision is not made unless the marginal benefit exceeds the marginal cost. The final principle is that people respond to incentives. Behavior changes when cost or benefits change. These principles explain how the economy functions as a whole. Since resources are scarce people have to make decisions based on benefiting themselves on how to spend their time and money. To make rational decisions people must interact with the environment and other decision makers. These interactions lead to the best allocation of resources. When people interact with one another they make trade for resources when the benefit is mutual. For example buying a soda the buyer is thirsty and enjoys soda so he or she will benefit from the soda, and the vender will benefit from the money for the soda so the trade has been made. These interactions are affected by the economy system present. In a centrally planned economy central authorities make decisions for what would be the best use of their goods and resources. The state can set prices of goods and determine how much to produce. Therefore, decisions are not voluntary. Decisions are voluntary in a market economy where the pricing of goods and services are guided solely by the interactions of a country’s citizens and businesses. In a mixed economy system where there is a variety of public and private control decisions are voluntary as well....