How People Make Economic Decisions

How People Make Economic Decisions

Economics is not about money but about choices. Hubbard & O'Brien, 2010 states that "Economics is the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources" (p. 4, Hubbard & O'Brien, 2010). Three important economic thoughts are related to individual decision-making: people are rational, people respond to economic incentives, and optimal decisions are made at the margin (Hubbard & O'Brien, 2010). This paper discusses these principles as well as main attributes to the economic models and systems.

People Are Rational

People don't always make the best decision; however, economists assume that people are rational and make the best decision possible that will help them achieve their goals. Along these lines economist assume that people make purchasing decisions for goods and services based on what they can afford and the level of satisfaction or enjoyment they will receive or utility.

People Respond to Economic Incentives

Businesses and governments frequently use incentives to increase consumption of goods and services. As an example, in 2010 the U.S. government enacted the Car Allowance Rebate System (CARS) or better known as "Cash for Clunkers." The program offered three billion dollars in economic incentives to residents in the U. S. to trade in vehicles which were not fuel efficient for one's that were. The purpose of the program was to boost automobile sales and increase the number of cleaner, safer, more fuel-efficient vehicles. A study reported by NPR (National Public Radio) states that during the two-month rebate period auto sales increased by 360,000. Unfortunately, sales decreased by the same amount in the seven months that followed. Some economists believe that the program only encouraged people who were already in the market for a new vehicle to purchase one during the rebate period (Cook, 2011). Consumers did respond to the incentive; however, based on the sales history it appears that those who took advantage of the program were already in the market for a new vehicle.

Optimal Decisions are made at the Margin

Economists use the word margin or marginal to mean additional or extra (Hubbard & O'Brien, 2010). The economic assumption that "optimal decisions are made at the margin" means that decisions are made at the point where the benefit and the cost are equal. Marginal analysis determines when marginal benefits equal marginal costs.

Recently, I made the decision to join Weight Watchers. The marginal benefits are assistance with weight loss goals, loss of body mass that will improve my health, and an improvement in self esteem. The marginal cost associated with the decision

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