Essay On Economic Decision Making

How People Make Economic Decisions

Joanna P. Curran

University of Phoenix

April 28, 2014

Almost everyone in our society engages in economic decision making at some point. Budget constraints influence us all and our economic decision making. In a perfect world, the sum of all our expenses should never exceed the availability of our money. The basis of economic decision making is one’s desire to maximize benefits while minimizing costs. “Economist reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost – in symbols, where MB=MC.” Hubbard, R.G. & O’Brien, A.P. (2013).

I recently purchased a new car, I put off doing this for a very long time. I had no car payment and I knew when I purchased a new car I would need to finance it, and would in turn take on more debt and a monthly car payment. It got to the point that I was spending a great deal of money repairing my car to have something new break down the next month, the MB=MC. I knew at this point I needed a new car. The marginal benefit of not having a car payment was equal to the marginal cost of repairs. When I factored in the incentives of purchasing a new car such as better gas mileage (a savings of $200 per month), reliability, no more repair bills, I determined that it made sense to invest in a new car.

Economist believe there are four basic principles to individual decision-making, they are people face trade-offs, the cost of something is what you give up to get it, people are rational, and people respond to incentives. Costs and benefits are key factors that all economic decision makers take into account. They believe that for every decision, something must be gained and something must be lost. The...

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...pend their money. Some of the most prosperous economies in the world such as the US, Canada, Japan, and Great Britain are based on the concept of a market economy. The basic idea of the mixed economy is that it allows the people free will to make decisions except for when the government steps in creating an indirect influence over the economy. India functions in a mixed economy system.

I believe that the happiest and most prosperous people live in a market economy. The people living in a centrally planned economy are probably for the most part not very happy, as they do not get to decide for themselves their career paths, and they can be stuck in a job that they don’t like in a field they have no interest in; that would be horrible. A mixed economy would be an alright economic system, not as good as a market system but much better than a centrally planned economy.