How Poeople make economic decisions - Essay Example

Individual decision making is made based on the criteria of cost and benefit wherein individuals measure the cost as well as benefits of taking any action as a result of that decision. Principles of economics are important in individual decision making because in economic sense, decisions are taken based on the utility achieved by an individual from taking any action or preferring one alternative over another. Individuals therefore interact with each other in manner wherein exchange between them yield maximum individual utility.

The overall interaction of the economy therefore is also based upon best allocation of resources and their optimal use. This optimal use can only be achieved if individual decision making is based upon gaining maximum utility and where marginal benefit of making a decision is greater than marginal cost. A market economy is solely controlled by the market forces of demand and supply without the intervention of government. A market economy therefore is regulated by the market itself and all the decisions are based on the demand and supply dynamics.

In centrally planned economy, all decisions are made by the central authority i.e. government, and economic interactions are determined by the central authority. Prices are determined by the central authority therefore market forces do not come into play while setting the prices in the market. (Bade and Parkin) In a mixed economy, decisions are taken jointly by the government as well as the market forces. Resource allocation is mostly based on the market however; government can intervene in order to correct the balance in the overall resource allocation.

Economic interaction therefore takes place due to the involvement of both the government as well as the market forces. Bibliography Bade, Robin and Michael Parkin. Foundations of Microeconomics. New York: Pearson Education, 2010.