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Four Principles of Individual Decision Making - Assignment Example

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This paper "Four Principles of Individual Decision Making" focuses on the individual decision making in economics which is usually connected to four major principles: People face tradeoffs; The cost of something is what you give up to get it; Rational people think at the margin, etc.  …
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Four Principles of Individual Decision Making
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Four Principles of Individual Decision Making
Individual decision making in economics is usually connected to four major principles which are; People face tradeoffs; The cost of something is what you give up to get it; Rational people think at the margin and People respond to incentives (How people make decisions, n. d, p.3)
The first principle says that we need to give up something which we don’t like for getting something. For example, in order to purchase a computer we need to give up some money. In fact we don’t like to give up our money because of the value associated with it in human life. But in order to purchase a television we have no other way, but to give up some money. In economic terms it is said that “There is no such things as a free lunch”.
The second principle says that the cost of something is what we give up to get it. For example, consider a person forced to give up $ 200 for purchasing a television the cost of that television would be $ 200. If another person spends $ 300 for an advanced television the cost of that television would be $ 300. Suppose a person exchanges a television for a mobile phone, the cost of the television and the mobile phone would be equal. In short, cost of a commodity is determined by the sacrifice we did to achieve it or gain it.
The third principle says that whenever rational people purchase something they will think of the margins they may get. In other words rational individuals compare the marginal benefits and the marginal costs before taking a purchasing decision. Suppose a person think of purchasing some gold as an investment. The prices of gold goes on increasing at present and a rational person know that if he invests in gold now, he will get more benefits in the future. At the same time he has another option of investing the money as term deposits in banks. But the marginal benefits received from banks as interests might be less than the marginal benefits gets from the gold investment. In other words the decision to select one alternative over other depends on the marginal benefits associated with both of them.
The fourth principle says that people may respond to incentives. For example, buy one get one free is a common sales strategy adopted by many manufacturers. When we go to shopping, we often see advertisements like that. A person visiting a shopping mall for purchasing a particular brand of shirt may change his decision if he sees the advertisement of another branded shirt in which they offer one free shirt of same quality for every purchase of a new shirt from them. Thus incentives may often influence the decision making of individuals.
In short, in economical terms, individuals often take their decisions based on the tradeoffs, costs, margins and the incentives.
References
1. How people make decisions, (n. d), Retrieved on 18 April 2010 from http://www.scribd.com/doc/19109396/Principles-of-Economics Read More
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