Every day, people make decisions of varying degrees of importance. According to Hubbard & O’Brien, the issues discussed in economics are illustrated by a basic fact of life: that people must make choices as they try to attain their goals. Economics is the study of the choices people make to attain their goals given their scarce resources (Hubbard & O’Brien, 2010). Each individual will vary as to the outcome of their decision based on the situation, but the common denominator seems to be the principles of individual decision-making.
Scholars may disagree somewhat on these principles. However, there is a consensus that includes three important principles. According to Hubbard & O’Brien, these are: 1)People are assumed to be rational. 2)People respond to economic incentives. 3)Optimal decisions are made at the margin. Let’s look at each principle individually for a brief explanation. The first principle is that of rational behavior. People are assumed to be rational. However, this does not necessarily mean that each person given a choice will make the best decision or the right decision.
It can be interpreted to mean that people usually act rationally based on the choices presented to them. Secondly, people respond to economic incentives. If it makes sense and will benefit the person, that person will respond accordingly. Again, what makes one person decide to do something over another will vary, but the principle stays the same. Lastly, people make optimal decisions at the margin. Sometimes, a decision one makes is all or nothing. Usually, it is incremental and involves a cost versus a benefit.
Economists call these marginal changes and refer to additional time as marginal (Hubbard & O’Brien, 2010). For example, a person may choose to spend money on a coffee at a retail outlet or save that amount for something else. Recent Real-Life Decisions Recently, I was faced with the decision of putting aside money to give as a gift or spending it on paying off more debt. Without conscious thinking, a decision was being made in which a comparison between marginal benefits and marginal costs took place. The marginal benefits on the side of the gift were additional happiness for me and for the grantee.
The marginal costs were the extra month or two it would take to pay the debt, including the added interest. On the other hand, a different person may have seen the marginal benefits and costs to be reversed. That is, the benefit would be paying off the debt earlier and saving the interest. The cost would be not giving the gift at all or a lesser gift. After comparing the costs and benefits, I decided to put the money aside to give as a gift. In my personal opinion, the happiness gained far outweighed any extra interest now owed. Suppose that there were incentives available to me at the time of the decision.
There is only one incentive I could think of that would have led to a different decision: if the debtor was willing to give a drastic balance or interest cut based on payment being received at a specific time that occurred before the gift would be given. Principles of Economics – Interaction It is important to consider the interaction of the people who make decisions and the workings of the economy as a whole. There are a few ways that people can interact with one another in relation to economics. According to the website at alverno. edu, there are three underlying principles that illustrate how people react with one another.
Those are: 1)Trade can make everyone better off 2)Markets are usually a good way to organize activity 3)Governments can improve market outcomes The workings of the economy as whole can also be represented by three principles: 1)Prices rise when the government prints too much money 2)Society faces a short-run tradeoff between inflation and unemployment 3)Country’s standard of living depends on its ability to produce goods and services These six principles provide examples as to how the interaction between people can work for the economy as a whole and how they react to one another.
Conclusion Whichever economic system is used (market, centrally planned, or mixed), decisions are being made in people’s lives to attain their goals in light of a scarcity of resources. Economic interactions are affected by the type of system present but that doesn’t change the fact that decisions must still be made by someone to attain those goals. Marginal costs and benefits will be weighed and the three economic principles of rational behavior, optimization at the margin, and responsiveness to incentives will be constantly at work.