Principles of Decision Making
Principles of Decision Making
“Our economy is the result of millions of decisions we all make every day about producing, earning, saving, investing, and spending” by Dwight Eisenhower (UBR, Inc. , 2007). What are the principles behind an individual’s decision making? According to Mankiw, the four principles of individual decision making are as follows: “people face trade-offs, the cost of something is what you give up to get it, rational people think at the margin, and people respond to incentives. ” People face trade-offs by having to give up something to get what they want or need.
This is no surprise for most people who learn early in life that few things are free. A trade off is when you put more into one and less in the other. As an example of a trade-off, many times college students give up spending time with their families and friends in order to do homework and accomplish their long-term goal of earning a degree. Because of “trade-offs, making decisions require comparing the costs and benefits of alternative courses of action” (Mankiw, 2007, p. 6). The cost of something is what you give up to get it. This clearly emphasizes that there are always costs to every decision that we make.
These are what we called opportunity costs. An opportunity cost is what we have to give up to gain something else. It does not always have to be about financial matters but also situational issues. If individuals make the decision to return to school, they not only have a cost of monetary impact on life but also a cost of time because they have chosen to study over their alternatives of working or socializing. Rational people think at margin. A rational decision maker “takes an action if and only if the marginal benefit of the action exceeds the marginal cost” (Mankiw, 2007, p. ). Economic decision makers act in a rational manner.
This means that decision makers prioritize the end results of their actions. They decide based on their wants and needs. “Rational people systematically are purposefully do the best they can to achieve their objectives, given the opportunities they have” (Mankiw, 2007). According to Mankiw, marginal changes are just slight adjustments to what is already being done by comparing the marginal cost and marginal benefit of something. This could be an individual going to the store to buy sugar.
If the store has two brands of the same size that are of different prices, a person will buy the least expensive because there is no benefit to purchasing the more expensive sugar. Also, if a person desired to achieve higher grades, it is most likely that he would spend longer hours studying and reviewing his/her course. Also, if there were two competing companies, one offering a large compensation with benefits, the other lacking resources to render incentives, it is assumed that the applicant would prioritize the more productive company.
In deciding what is profitable in any economic situation, a decision maker has to assess the costs and benefits of any specific course of action. An example of a decision comparing the marginal benefit and the marginal cost associated with that decision occurs when purchasing a marked-up, last minute cruise line ticket for a very important business transaction. The other alternatives are to either drive a car, ride on a plane or wait seven days to pay a much lower fee.
The marginal benefits of less travel time, increased comfort and being able to meet the deadline on time all outweighed the marginal cost of the increased fee. The decision made was based on personal incentives and satisfaction. Of course, if the cruise line ticket fee had been higher than traveling by car, I would have chosen driving to have more vacation time and be able to reduce cost. Truly, marginal benefit and marginal cost help in making financial decisions. Our personal budgeting skills will improve as we measure the costs of a financial decision. We will also consider the affordability of the products and services.
The principles of economics affect decision making, interaction, and the workings of the economy as a whole because all people make decisions based on what they want and is best for them personally. For instance, the marginal costs and benefits are a vital part of economics because they help provide the relevant measurement of costs and benefits at a specific level of production and consumption. Even if we do not realize it, we all make decisions based on our marginal evaluations of the alternatives. Like in buying a car, we consider not only affordability but also convenience.
Economics plays a very significant role in many different aspects of people’s lives. Every decision people make from how much they work, spend, save, and invest plays a role on their economy. Economics is something people use in a daily basis without even realizing it. Applying the said principles in decision making will allow us to plan and organize our goals in a rational and distinct manner. Knowing the cost of doing something will bring us awareness and make us more cautious as we implement our plans. It enables us to identify the trials and hardships that we have to face before reaching our goals.
Exploring more about trade-offs brings us to the reality that in every aspect of our life, we have to consider giving up something before achieving what we really want. For example, big or small businesses have to consider the trade-offs in order to gain higher profitability. That is why some companies decrease manpower to reduce cost. On the other hand, doing this means depriving many workers the opportunity to earn for their families. The principles of economic decision making widens our perspective and guides us in implementing productive ideas.
Subject: Decision making,
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 23 September 2016
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