Individual Decision Making Principles
There are four individual decision-making principles, and they refer to the concepts established by Gregory Mankiw. As a result of these principles, students and businessmen have a better comprehension of the motivational features that enhance interaction between consumers.
We will write a custom Essay on How People Make Economic Decisions? specifically for you
301 certified writers online
The first principle is that an individual should never risk more than he can afford to give. This involves more than financial ventures. It implies that it is unwise for an individual or business to engage in a venture that requires more resources than can be donated. Only the individual is aware of what he can afford in regard to emotions, energy, and time. Therefore, an individual should stick to the decisions that match his willingness to dedicate resources for an activity (Klein, 1998).
According to the second principle, an individual should never risk more than he has. This gives the implication that individuals and businesses are restricted in regard to resources. There is a limited supply of money, space, time, and energy. Therefore, an individual should never attempt to use more resources than he has. Every decision involves the utilization of some resources. However, no economic venture should exhaust all the resources in a given department.
According to the third principle, an individual should assess every decision in regard to the benefits he will achieve. Therefore, it is recommendable to only engage in risks that are linked to particular benefits.
The fourth principle implies that it is worth being proud of the decisions one makes. Only an individual can make the best decisions for himself. Sometimes, adolescents may feel that the parents are forcing them into specific decisions. However, even when the parents make decisions for the teenagers, they are also involved in decision making since they adhere to the options presented to them.
Marginal Costs and Benefits
The totality of an economy’s strength influences the marginal costs and benefits linked to the decision to buy a home. During instances where there is growth in the economy, a person may have no second thoughts about buying the home. The home would satisfy the person’s needs, and his expectation is that the economy would continue escalating. In this case, the marginal benefits are higher compared to the marginal costs. During an economic recession, buying a home is a totally wrong idea (Choo, 1996). In this regard, there are always preferences to save or spend during particular periods. Removing tax deduction from the mortgage interest minimizes the need for a home.
The Relationship between Decision Making and Economics Principles
From the foregoing discussion, it is evident that the principles of economics play a significant role in influencing the decisions made.
Key Attributes of Economic Systems
The market economy is also referred to as the free enterprise economy. A key feature is the limited government’s obligation. The sellers and buyers make the majority of economic decisions, and the government does not participate. Furthermore, there is efficient utilization of resources, and the economy is self- adjusting and self- regulating.
Centrally Planned Economy
The government makes a majority of the economic decisions. This was experienced in the Soviet Union before 1991, Cuba, and North Korea.
Irrespective of the fact that the sellers and buyers make the majority of the economic decisions, the government participates in allocating particular resources.
How an Economic Affects Economic Interactions
Economics in a particular country plays a role in determining economic partners and relations.
Choo, C. W. (1996). The knowing organization: how organizations use information to construct meaning, create knowledge and make decisions. International Journal of Information Management, 16(5), 329-340.
Klein, G. A. (1998). Sources of power: How people make decisions. New York: The MIT Press.