How People Make Economic Decisions

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Introduction

Decision making is very crucial in any context of economic decision making. Part of this decision making is individual decision making. Principles of individual decision making entails the principle of tradeoffs, the principle of opportunity cost, the principle of rational margin and the principle of incentives (Mankiw, 2008 p.6)

The principle of trade-offs

According to the principle, a decision will always entail giving one choice for another. This is non-refutable fact during any decision making process. A decision will be traded on factors such as time, cost as well as benefits.

The principle of opportunity cost

During trading -off of choices of actions in the decision making process, a cost of giving up one choice of action must be considered. An individual is therefore required to have prior consent of such lost advantage if one action is chosen over the other.

The principle of rational margin

During individual decision making process, an individual is supposed to use the right rationale to attain the best satisfaction from the action chosen amid the changes that may arise from the end results of that action.

The principle of incentives

In order for individuals to make the best decision they must be enticed with such incentives like rewards if an objective of a decision is met, or punishment if the decision fails. It is worth noting that incentives will play a greater role in ensuring individuals optimally use their rationale in factoring out the best action in terms of costs and benefits.

Example of a decision making scenario

After working as an operation manager in inter-state train company, I found out that the cost of operating inter-state train which carries 200 passengers is an average $100,000. It is therefore logical to conclude that each seat will cost $ 500. Thus, it is rational for the operations manager of inter-state train company to charge at least $300 in case the train takes off with almost 10 seats empty.

Marginal cost and marginal benefits of the decision

The average cost of operating with one passenger was $ 500 and so it required the train to at least have 200 passengers to operate at $100,000. It is therefore logical that the train charges less for the empty seats since their marginal cost of the extra passengers is minimal considering the cost of other services that the train company has already put in place such as water and energy drinks.

According to the above decision, it is probable that incentives such as better remuneration could have resulted to a better decision. In addition, I would have considered making a better decision if it entailed reaching the company’s sales targets. A better marketing strategy would also have supplemented the decision.

It is clear that the principles of economics are just but theories of knowledge (Boland, 1992 p. 99). It therefore emerges that theories are relative and such principles will try to be supported by evidences that may not actually exist in the near future, bringing into consideration an element of expectations.

It is therefore logical to assume that such principles do not make decision making an absolute act but a relative one and so in decision making factors such as market, environment, and politics will always be considered. Any system on economy has such factors which interact together and none can work without the other in an economy system. It is thus held that if such principles are not held in commonality they cause instability to the entire economy system.

Attributes of market economy, centrally planned economy and mixed economy systems

A market economy system entails free exchange of market products and services without price limits or predetermined prices. A lot of freedom is given to sellers and buyers regarding place of selling and rights to property (Taylor, 2006 p.15).

On the other hand, centrally planned economy which is popular in china characterize the market factor acting as an auxiliary element while much of the economy is institutionalized, in this case the institutions manage the economy (Gemper, 1990 p.107). Mixed economy is however characterized by a mixture of both market economy and planned economy systems.

Finally, economic interactions in a single economic system or between economic systems will only depict the type of economic system that exists at a particular moment or nation. In this context, it is possible to see interaction such as exchange of economic goods between countries and states, contracts of business between organizations from different countries and sometimes exchange programs of academic students between or among countries (Eckstein, 1971p. 76).

References

Boland, L. (1992). The principles of economics: some lies my teachers told me. New York: Routldge.

Eckstein, A. (1971). Comparison of economic systems: theoretical and methodological approaches. California: University of California Press.

Gemper, B. (1990). The market system, structural change, and efficient economies: the international trend towards indicative targeting. New Jersey: Transaction publishers.

Mankiw, G. (2008). Principles of economics. Stamford, CT: Cengage learning.

Taylor, J. (2006). Principles of macroeconomics. Stamford, CT: Cengage Learning.

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