Principles of Decision Making
Principles of Individual Decision-making
Name
University of Phoenix ECO/212: Principles of Economics
Instructor
Date In life, we have to make a decision just about everything that we do. These decisions affect our daily lives and they sometimes they affect the lives of those around us. When making these decisions there are make factors that go into making a final one. In economics there are four principles that effect how a person makes a decision (Mankiw, 2007):
• People face trade-offs. • The cost of something is what you give up to get it. • Rational people think at the margin. • People respond to incentives.
These four principles play an important role in economics. This paper will define each individual principle and then give the reader an insight on a personal decision of the author using the aforementioned principles.
Trade-offs Making a trade-off is basically, choosing one thing over another. A classic Italian quote referring to a trade-off is “you can’t have a full wine bottle and a drunk wife”. As modern technology advances, one could argue that society has traded-off battery life in personal electronics for a smaller size and weight of the individual device.
The Cost is What You Give Up After you have looked at what is being traded-off, then you can determine the true value of your decision by what you are giving up for it. As in the previous example of personal electronics, giving up battery life has a serious downside in that the personal electronic device will have to be charged more often, or it will be wired to a wall while the device is in use and charging. Here the cost can be a great one to a person that is constantly on the go.
Rational People Think at the Margin As Mankiw (2007) pointed out “Economists normally assume that people are rational” (p 6). Being rational means that an individual will do all that they can to
Name
University of Phoenix ECO/212: Principles of Economics
Instructor
Date In life, we have to make a decision just about everything that we do. These decisions affect our daily lives and they sometimes they affect the lives of those around us. When making these decisions there are make factors that go into making a final one. In economics there are four principles that effect how a person makes a decision (Mankiw, 2007):
• People face trade-offs. • The cost of something is what you give up to get it. • Rational people think at the margin. • People respond to incentives.
These four principles play an important role in economics. This paper will define each individual principle and then give the reader an insight on a personal decision of the author using the aforementioned principles.
Trade-offs Making a trade-off is basically, choosing one thing over another. A classic Italian quote referring to a trade-off is “you can’t have a full wine bottle and a drunk wife”. As modern technology advances, one could argue that society has traded-off battery life in personal electronics for a smaller size and weight of the individual device.
The Cost is What You Give Up After you have looked at what is being traded-off, then you can determine the true value of your decision by what you are giving up for it. As in the previous example of personal electronics, giving up battery life has a serious downside in that the personal electronic device will have to be charged more often, or it will be wired to a wall while the device is in use and charging. Here the cost can be a great one to a person that is constantly on the go.
Rational People Think at the Margin As Mankiw (2007) pointed out “Economists normally assume that people are rational” (p 6). Being rational means that an individual will do all that they can to
References: Mankiw, N. G. (2007). Principles of Economics. Mason, Ohio: Cengage Learning.