...How People Make Economic Decisions Francisca A. Castellanos ECO212 January 18, 2011 Evanthis (Pete) Mavrokordatos How People Make Economic Decisions Decisions, decisions, decisions…Decisions are the worst, and yet we must make them each and every day. The ten principles of economics explains how people make decisions, how people interact, and how the economy as a whole works. Economics is a behavioral science, which studies how societies manage their scarce resources (Hubbard-O’Brien, Glossary). Societies have different economic interactions that are affected by the type of economic system present. The main attributes of each system are as follows. In a market economy decisions of households and firms interacting in markets allocate economic resources (Glossary). In a centrally-planned economy the government decides how economic resources will be allocated (Glossary) and in a mixed economy economic decisions result from the interaction of buyers and sellers in markets but the government plays a significant role in the allocation of resources (Glossary). My small society (household) depends on me to allocate our scarce resources (monetarily), taking into account our abilities, efforts, and desires. My husband makes decisions based on our emotional needs as a family, yet both parts are equally important. How People Make Decisions Principle One: People face trade-offs. Making decisions requires trading off one item for another. I face this dilemma all the time because...
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...Class-1 Ten Principles of Economics Economy. . . . . . The word economy comes from a Greek word-Oekonomous- for “one who manages a household.” Any similarity between household and economics? Copyright © 2004 South-Western/Thomson Learning TEN PRINCIPLES OF ECONOMICS • A household and an economy face many decisions: • Who will work? • What goods and how many of them should be produced? • What resources should be used in production? • At what price should the goods be sold? Copyright © 2004 South-Western/Thomson Learning TEN PRINCIPLES OF ECONOMICS Society and Scarce Resources: • The management of society’s resources is important because resources are scarce. • Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Copyright © 2004 South-Western/Thomson Learning TEN PRINCIPLES OF ECONOMICS Economics is the study of how society manages its scarce resources. Copyright © 2004 South-Western/Thomson Learning TEN PRINCIPLES OF ECONOMICS • How people make decisions. • • • • People face tradeoffs. The cost of something is what you give up to get it. Rational people think at the margin. People respond to incentives. Copyright © 2004 South-Western/Thomson Learning TEN PRINCIPLES OF ECONOMICS • How people interact with each other. • Trade can make everyone better off. • Markets are usually a good way to organize economic activity. • Governments can sometimes improve...
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...Economic Decision Making Renice Taylor ECO/212 Monday, February 14, 2011 Anusuya Chatterjee Economic Decision Making Today, every individual must make a decision in his or her lifetime. However, every individual does not make decisions in the same manner. In economics, there are four major principles of decision-making: “people face trade-offs”, “the cost of something is what you give up to get it”, “rational people think at the margin”, and “people respond to incentives” (Ten Principles, n.d., pgs. 4-7). “People face trade-offs” is simply the concept of giving up one thing that we like for another. “The cost of something is what you give up to get it” means that cost will always be a factor. However, it should not be the only one. “Rational people think at the margin” refers to individuals thinking in shades of gray. “People respond to incentives” deals with the majority of middle-class citizens. Many individuals will hold on to their money until a sale comes along. Recently, my husband and I were in the process of deciding whether to lease a new sports utility vehicle or finance an older one. The benefits of leasing will be driving a new vehicle. There are no worries of damage done with the previous owner, accidents, etc. However, after looking at the marginal costs...
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...of personal wealth. All ten of the principles of economics are directly related to the decision to purchase a house on some level. These economic principles will have an impact on the purchasing decision and the long term financial aspects of home ownership so it is wise to incorporate these ten principles into the decision making process to ensure a sound financial decision is the outcome. When considering the purchase of a house, the ten principles of economics that need to be addressed can be broken down into three stages of the decision making process. The first step is to examine how the decision is made by incorporating the first four principles of economics which include, the trade off that comes with every financial decision, the real cost of any item or service is what is given up to get the item or service, rational people think at the margin, and people respond to incentives. Once it is clear how the decision is made, the next three principles of economics address how people interact with economics and include factors such as, trade is beneficial to everyone, markets are a good way to organize economic activity, and the government can improve the markets with fiscal policy and all three will have an impact on the decision to purchase a home. The final leg of the decision making process includes taking into consideration the last three economic principles which speak to how the economy works as a whole and include economic principles such as, a country's...
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...The decision to purchase a house is one of the most important decisions, and largest purchases an individual will ever have to make. There are many factors to take in to consideration, and I am now finding myself having to go through the process for the first time. There are ten principles of economics and I have found all ten of them to be quite necessary and beneficial in my decision. A larger living space is most certainly needed regardless, but I have many things to think over first. These principles have helped me to decide if now is the right time in our economic state to purchase, or to continue renting. The first factor that needs to be taken in to consideration is budget. Will I even be able to afford a home? Once taking my income and subtracting my expenses, I will have a ballpark estimation as to what I will be able to afford monthly for a mortgage. However, it is not that easy to figure. I also have to take in to consideration the things, (expense wise) that I will have to give up. There will most certainly be things I will have to give up to possibly make the mortgage. For instance, I will be paying more for utilities, so I may have to give up cable television to make up the difference. I will also have to think of the additional expenses that come with owning a home and also having a child. Location is a big factor in the purchasing of a home. As of now, I am not in an area that is really child- friendly. I have no local schools...
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...Unit One: Introduction Chapter 1: Ten Principles of Economics Learning Objectives * Learn that economics is about the allocation of scarce resources * Examine some of the trade-offs that people face * Learn the meaning of opportunity cost * See how to use marginal reasoning when marketing decisions * Discuss how incentives affect people’s behavior * Consider why trade among people or nations can be good for everyone * Discuss why markets are good, but not perfect, way to allocate resources * Learn what determines some trends in the overall economy Ten Principles of Economy * Management of society’s resources is important because resources are scarce * Scarcity – limited nature of society’s resources * Economics – study of how society manages its scarce resources How People Make Decisions Principle #1: People Face Trade-offs * To get one thing we like, we must give up another. Making decisions requires trading off one goal against another * Classic trade-off is between “guns and butter”. The more we spend on national defense, the less we spend on consumer goods to raise our standard of living at home * Trade-off between a clean environment and a high level of income is another modern conflict. Pollution regulations raise the cost of producing goods and services, causing firms to earn smaller profits, paying lower wages, charging higher prices, ect… * Another trade off society faces is efficiency and equity. Efficiency...
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...A New House - Decision Tonya L. Pugh XECO/212 ECONOMIC THEORY May 6, 2012 Frederick C. Runge, MBA, PMP Growing up all I ever dreamed of was one day to get married to the perfect man, have two perfect little children, and to own my own perfect little house. I did not follow that order when getting these things; however, at thirty six years old I do have it. I am a wife, and no man is perfect I have learned. I am a mother to three beautiful and healthy children, an eighteen year old daughter and twins (girl and boy) who are nine. The house, which is perfect for us in its own right, is coming now, after a lot of hard work and sweat, not to mention a lot of planning and decision making. Locating a house in an area we want to live in is the easiest part of looking for our new home. My husband and I have chosen to stay in the area we are currently living in and renting a home. Everyone here is close and we all look out for one another. My parents are not far, so they can get our children from school and watch them until we get home from work. The local elementary and middle school is within walking distance from the houses we are looking at, as well as the local hospital, fire and police departments, church and local health clinic. Before we move any further in buying our home we need to sit down and make a list of the pros and cons for buying and renting. This is now the biggest decision we are facing in our lives and what we decided will affect us for a long time to come. We need...
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...that their home is their castle, but is this still true in this country? With the financial downturn and the home foreclosures at a all time high, nearly every block I see has a home for sale at reduced price so how does this milestone still hold up to scrutiny and how can this generation still reach for that goalpost of what is considered the standard of the happy nuclear family? The decision to purchase a home is the major point in an American life and it is a decision that should not be taken lightly because if not done correctly and with a plan on how to sustain the purchase that is not solid the consequences could be dire. After taking this course I have found out that there are methods and concepts that if implemented correctly the idea of owning a home is still within grasp of many of us but there are many things that need to be weighed before pulling the trigger on such a large and momentous decision. First are the ten principles of economics which I will go into more detail later on that are crucial to making a large purchase be it a home, car, or any other large ticket item that can have ramifications on other aspects of your lives. Next one needs to weigh the marginal costs and marginal benefits of their decision to see all aspects of the decision no matter how minute they may seem. There needs to be an understanding of the state of the current economy as well as the trends that point to where the economy may be going in the foreseeable future so that the timing...
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...decision can become costly. Such factors include some of the ten principles of economics and the strength of the economy as a whole. All of these factors play a role in which I decide if buying a home is in my best interest. There are ten principles of economics; these principles are based on the ways that people make decisions, how people interact, and how the economy works as a whole. In deciding to purchase a home, the principals that weigh on my decisions are: facing trade offs, the cost of something is what you give up to get it, rational people think at the margin, markets are usually a good way to organize economic activity, and a country’s standard of living depends on its ability to produce goods and services. The trade off to owning a home is expense. Owning a home is more expensive than renting a home. This is because the owner pays for all repairs, maintenance, and upkeep. The owner also pays for all utilities. When renting a home, since the owner pays the cost of repairs, maintenance, upkeep and some utilities, the renter does not have to come out of pocket for these costs. Along with owning a home comes property taxes, which in my city, these taxes are due twice per year and depending on the worth of the home and property, can become quite costly. A benefit of owning a home would be that all remodeling would be to the owner’s liking and they can choose how they want the structure of the home to look inside, they can...
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...TEN PRINCIPLES OF ECONOMICS * Economics—the social science that studies how society allocates its scarce resources to those with unlimited wants * Scarcity—limited amount * Resource Types: * Land * Labor- job availability * Capital-manufactured aid to production( i.e., manufactured goods…desk..markers…) * Entrepreneurship- person who starts a business; combines land, labor, and capital to produce a business * LIMITED RESOURCES = LIMITED PRODUCTION OF GOODS AND SERVICES * ALLOCATION: * Market system * Command system TEN PRINCIPLES: GROUPS A. How households (people) make decisions B. How households (people) interact C. How the economy as a whole works A. How households make decisions: 1. People face trade-offs: a. Personal—doing more of one activity and doing little to none of another activity b. Production—producing more of one good and producing less of another good Most money spent towards: * Defense * Social security * medicare c. Efficiency/Equity—society chooses b/w being efficient or equity; more efficiency= less equity ~ more equity= less efficiency * Efficiency—exists when the society gets the most from its resources * Equity—exists when societies output is distributed fairly among its members * Redistribution: among members of society, i.e, social security (OASDI), unemployment, welfare (TANF= food stamps, housing)...
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...Annotated Bibliography of Fredrich Hayek Shacorra Hall ECO 561 May 22, 2015 Dr. Robert Dratwa Friedrich August Hayek: The Concise Encyclopedia of Economics. (2008). Retrieved from http://www.econlib.org/library/Enc/bios/Hayek.html In this online article exerted from the Library of Economics and Liberty, the economic theories of Friedrich Hayek are glorified and explained. Hayek is the best-known advocate of Austrian Economics. This writing focuses on the idea that the market is a spontaneous order. The belief that the free market was not designed by anyone, but evolves slowly as a result of human actions. It is stressed that the market is imperfect, and reasons for this imperfection are given. The question Hayek asked was “What causes the market to fail to fail to coordinate people’s plans, so that at times large numbers of people are unemployed?” One explanation given was the increase in money supply by the central bank. Increases by the central bank have the capability to drive down interest rates, inevitably making credit artificially cheap. Contributing to this issue, is business men making capital investments, unknowingly receiving distorted price signals from the credit market. Capital investments are inconsistent. Long-term investments are more sensitive to interest rates. Hayek came to the conclusion that artificially low interest rates causes investments to be high, which in turn causes too much investment in long-term projects. Instances like this turn the boom...
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...think about and discuss our options of whether we want to rent first to save up money for a down payment or if we feel it is in our best interest to look into buying our home now. This is one of the biggest and most important decisions we will make in our lives, besides getting married and having children, because when you buy a home there is not just the substantial amount of money that is needed as a down payment, but there are other expenses that go along with home ownership. Aside from the financial aspect that figures into our decision, there are several others we need to take into consideration as well. For instance, since I am currently studying economics in college, it has been brought to my attention throughout the class that it is vitally important to have a basic knowledge of the ten principles of economics and to know which of them relates to the decision of purchasing a home. Also, the strength of the economy, not just...
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...10 Principles of Economics Supply and Demand * Supply and demand are inversely proportional: When supply rises, demand falls. For instance, when the housing market in a certain region is flooded with homes for sale, sellers drop the price to attract a buyer. However, single homes for sale in exclusive neighborhoods might have more potential buyers than sellers. In these instances, the price of the home rises. Inflation and Unemployment * Gregory Mankiw, Harvard Economics professor and author of "Principles of Economics" explains that society experiences a short-run trade-off with rising prices and unemployment: As the monetary supply expands and inflation occurs, unemployment rises. However, the Phillips curve indicates that in the long-run, inflation has no bearing on levels of unemployment. Effects of Price Controls * Price controls, like setting food prices in the former Soviet Union or rent control in New York, have negative effects for both buyers and sellers. Price ceilings create shortages and rationing of goods, and price floors create disincentives to improve on the quality of a good when it cannot be sold at the equilibrium price. Elasticity * Elasticity measures price responsiveness of a good or service. If the demand for a product changes significantly when the price changes, it is considered elastic. Examples of elastic goods include makeup and concert tickets. Inelastic goods show little or no change in demand when the price changes. Examples...
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...renting a studio apartment with my boyfriend. We have also just found out that we are expecting our first child, therefore our apartment is not going to be big enough for our growing family. We are discussing buying our first home and how we are going to afford it. When looking at the ten principles of economics, the first one that we will use to our advantage is principle 6-Markets are usually a good way or organize economic activity. Right now, the housing market is our area is very soft. Lots of homes available at very good prices and a lot of lenders looking to lend money to people at great rates. Another principle that comes into play in principle 1-Tradeoff. While you may gain things from the purchase, you will lose other things that you need to take into account when making your decision. Home ownership gives you a sense of pride and you are able to make whatever changes to the house and property that you want, but now that you are a homeowner you are responsible for all repairs and upgrades needed, there will no longer be a landlord to call when something breaks. That brings up marginal costs and benefits. Are the benefits of owning a home going to be outweigh the costs of owning a home? Are you moving closer to work or further away? How far away is the daycare from your home and your job? These are questions that you need to ask yourself when making the decision of buying a...
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...CHAP 1. TEN PRINCIPLES OF ECONOMICS I. Introduction A. The word “economy” comes from the Greek word oikonomos meaning “one who manages a household.” B. This makes some sense because in the economy we are faced with many decisions (just as a household is). C. Fundamental economic problem: resources are scarce. D. Definition of scarcity: the limited nature of society’s resources. E. Definition of economics: the study of how society manages its scarce resources. II. How People Make Decisions A. Principle #1: People Face Trade-offs 1. “There ain’t no such thing as a free lunch.” Making decisions requires trading one goal for another. 2. Examples include how students spend their time, how a family decides to spend its income, how the U.S. government spends tax dollars, and how regulations may protect the environment at a cost to firm owners. 3. A special example of a trade-off is the trade-off between efficiency and equality. a. Definition of efficiency: the property of society getting the maximum benefits from its scarce resources. b. Definition of equality: the property of distributing economic prosperity uniformly among the members of society. c. For example, tax dollars paid by wealthy Americans and then distributed to those less fortunate may improve equality but lower the return to hard work and therefore reduce the level of output produced by our resources. d. This implies that the cost of this increased equality is a reduction in...
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