Four Principles of Individual Decision Making - Assignment Example

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 are 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 on 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, the 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 making a purchasing decision. Suppose a person thinks of purchasing some gold as an investment. The prices of gold go on increasing at present and a rational person knows 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 get from the gold investment. In other words, the decision to select one alternative over others 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 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 the 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 make their decisions based on tradeoffs, costs, margins, and incentives.