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.
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 achieve their goal with all that they have available to them. A rational person thinking at the margin or on the edge will be able to make decisions that allow them to achive their goal without giving up to much in overall cost. Going back to the personal electronic device, an individual could choose to go with the smaller and more lightweight device because of its portability, but they’ll bring along a portable charging device also, or use the product more sparingly to make the most of the available battery power.
People Respond to Incentives
An incentive can be varied to something positive like a benefit or something negative like a consequence. Incentives can be a large part of an individuals decision making process. The incentive that an individual would most likely respond to when choosing the new personal electronic device would be that they are carrying around less weight, therefore making them more mobile. The consequence side that would affect the decision would be rooted in the fact they will not be able to use the device as much as they would like.
My Personal Decision
Recently I took up the hobby of cycling and competitive road racing. A lot of thought went into my decision on whether to get involved or not. I will layout how I can to my decision using the four principles of decision-making.
As I have aged I have picked up many hobbies. I was balancing my time between my hobbies, my family, and my job. My lists of hobbies included, but were not limited to, golfing, running, playing video games, and building model cars. I have always had bicycling as part of these hobbies, but it was only an occasional one. When I decided to actively cycle more, I had to decide what to give up in exchange. First on that list of trade-offs were all of my hobbies. Second was family time. Cycling can take up hours of a day. I usually average 2 hours a day of riding time during the week and up to 4 hours a day on the weekends. I had a lot to think about in my decision.
The Cost of what I gave up
Giving up my hobbies for cycling was not a cost at all to me because I took that time I was using for the hobbies and focused it towards cycling. The cost of lost family time is more significant and placed more of an impact on my final decision. Being in the Navy and having five to eight month deployments can be hard on a family, so all time spent at home is very valuable.
Rationally thinking at the Margin
Fortunately I was wasting a lot of time on my other hobbies that it allowed me more time then what I was spending on the bike. I used this spare time with the family at home. Also, I took into account that as my daughters age, I can get them onto bicycles and spend time with them when I am doing my slow recovery rides which play a large part in my training.
Finally, I took in to account the incentives of cycling to make the final decision. The most important incentive was setting an example to those around me. My children will see that I done just come home after work and do nothing constructive and that I am out there trying to improve myself . As for those I work with, they see that I can balance Work, Home and time for staying fit, and hopefully they will follow in my example. Another incentive was the aspect of fitness and personal health. No longer can there be the overweight chief that stresses the buttons of his uniform. In today’s Navy, a sailor is constantly representing his country, Navy, and ship. If a sailor does not fit in his uniform properly then he is not representing the Navy very well, and he could be hazard to the ship in an emergency situation if he is not physically fit.
In an economy there are four principles that are vital to the decision making process of how it will distributes it’s resources. The first is Trade-offs, giving up one thing for another. Then the determination of the cost of what you are giving up to get to your goal. Third, is the the thought that rational people think at the margin, meaning one will take advantage of all opportunities to achieve one’s goals. Finally, the principle that people respond to incentives, assists in determining the quantity or price of a certain resource. These principles are also applied in individual decision-making, and the results can affect more then just an individual but an entire economy.
Mankiw, N. G. (2007). Principles of Economics. Mason, Ohio: Cengage Learning.