ECO 212 Week 1 IA How People Make Economic Decisions Paper
ECO 212 Week 1 IA How People Make Economic Decisions Paper
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Date Created: 11/16/15
How People Make 1 Running Head HOW PEOPLE MAKE ECONOMIC DECISIONS How People Make Economic Decisions Name University of Phoenix How People Make 2 How People Make Economic Decisions Introduction This paper will focus on the role of economics on decisionmaking It will further explore how every individual applies both consciously and unconsciously the economic principles as they make decisions in their practical life To further strengthen the concept presented the paper will also include examples of decisions that are based on marginal benefits and marginal cost Incentives are also seen as a powerful in uence on the decisions of the people Finally the paper will establish the relationship between the simple decisions of the people to the condition of the economic systems and the worldwide economy in general Individual Decision Making Principles There are various economic principles that can aptly be applied to how a person makes a decision First principle deals with the risks involved in every decision This principles assume that an individual would only make a decision if there is a reassurance that the risks involved are manageable Basically every person has limitations and it would be highly impractical to make decision without knowing if he or she can face the consequences Next principle is about matching the resources with the risks that will be taken Relevant to principle one a person should first consider what resources are available and assess whether it is enough to sustain the decision even with the presence of the decision risks Taking risks without considering the available resources can only lead to losing all the resources to one simple decision The third principle states that an individual should consider the profits to be earned from a certain risk and if there are none then the risk is not worth taking at all Finally the last economic principle deals How People Make 3 with the level of confidence of a person in a decision he or she is about to make Mankiw 2009 Gut feelings can sometimes play a crucial role in the outcome of a decision Example Marginal Benefits Vs Marginal Costs The relationship of marginal benefits and marginal cost can be best illustrated by a decision that an employee is trying to make with regards to how he should spend his time after work The employee is choosing between attending gym sessions or simply heading home and continue with work This may be a very simple scenario but the role of marginal benefits and marginal cost is highly evident in this situation Attending fitness gym sessions will definitely cost the employee money However as long as the marginal benefits of this activity exceeds its cost then it is still a decision worth taking However if the assessment of the two activities reveal that staying home and doing work have more marginal benefits then the employee should just stick to this decision and forget about going to the gym Incentives that Lead to Making a Different Decision Economics says that people readily respond to incentives The presence of an incentive may even drive a person to make a decision connected to eat Still using the scenario presented above the employee can also try and evaluate which activity offers better incentives Technically each of the activities have their own incentives Working at home will eventually grant the employee extra recognition in his office for the hard work and timely output But going to gym is also undoubtedly good for the body and it is one of the best ways to stay fit despite a busy routine in the office Granting that there was not a promise of incentive in working at home apparently the employee would not even consider choosing it This is just an example of how economic principles apply and affect the decisions people make How People Make 4 Economic Principles39 In uence on DecisionMaking It becomes even crucial for the people who are in the government who can directly in uence the status of the entire economy The main role of the government officials is to make sure that all the national resources are well allocated This is why it is very important to take all the economic principles into consideration because millions of lives are depending on the decisions of the government officials With this the government should realize that decisions should not only come from one person but more importantly from the public who will either benefit or suffer from the consequences of the decisions Also it is from the people s hard work and money that the government uses to run the entire country Economic Systems Generally the economy of the world is comprised of three economic systems The market economy planned economy and mixed economy The market economy is the one that determines the prices of the goods which is free from the in uences of the government This economic system solely relies on the demand and supply of products to determine the prices On the contrary the planned economy is wherein the government can take control on the fixed prices of goods regardless of the marketability of a product Lastly the mixed economy is literally a mixture of the market economy and the planned economy Hubbard amp O39Brien 2010 This means that there is balance between the in uence of the market and of the government Idealistically speaking it is in this kind of economy that the world can get rid of any economic trembles Currently more and more countries are already using the mixed economic system Economic Interactions Affected by Economic System How People Make 5 Despite the differences the three economic systems still somehow interact With another Apparently for the market economy it requires less interaction With the government since they it only base the prices on the demand and supply of the product The same thing goes With planned economy Which the government solely sets fixed price for the product and there is no need to interact With another economy It is through mixed economic system that the two former system need to interact in order to achieve balance and come up With the best decisions for the country Mankiw 2009 How People Make 6 References Hubbard R amp O Brien A 2010 Economics 3rd ed Boston MA Pearson Hall Mankiw N 2009 Principles of Economics 5th ed Mason OH Thomson SouthWestern Mankiew N 2009 Essentials of Economics 5th ed Mason OH Thonson SouthWestern
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