How people make decisions

Our lives are consisting of many factors and the way we analyze these factors is different,
therefore we make decisions differently. How we make decisions gives way to the study of
Economics.
1. People face trade-offs – simply put, we cannot acquire one thing without having to give
up another. Individuals or society as a whole, faces these trade-offs. In all the activities
that we chose do from day to day there are also other things that we chose to forgo. We
chose the things that we chose may be because we deemed it to be something more
worthwhile or something that is of greater value to us.

2. The cost of something is what you give up to get it – having the understanding of how
people face trade-offs, we come to analyze as to why people choose one thing instead of
another and how do individuals undergo the process of making decisions. We assign
value to the things around us. What we let go when we choose to obtain one item instead
of the other is its opportunity cost. It allows us to understand the pros and cons when
dealing with a situation and helps us make better and just decisions.

3. Rational people think at the margin – rational people are people who systematically and
purposefully do the best they can to achieve their objectives. Rational people make
decisions by comparing marginal benefits to marginal costs. A rational decision-maker
will only take an action if the marginal benefit exceeds the marginal cost.
4. People respond to incentives – part of what affects the behavior and decisions of
individuals is incentives. Incentives are like ticks in our brain that gives us orders to
change our behavior towards something. Incentives induces a person to act.

How people interact

The decisions we make constitutes a greater whole. We are not the only ones in the society and
we need each other to survive therefore we make interactions. These interactions are governed
and defined by systems that we established.

5. Trade can make everyone better off – individuals don’t have everything they need and
also can’t produce everything they need. That is why trade is essential to keep the society
running. We exchange things that we have with things that we need but we don’t possess.
It allows us to specialize and enjoy variety of good and services.

6. Markets are usually a good way to organize economic activity – market economy is an
economy that allocates resources through the decentralized decisions of many firms and
households as they interact in markets for goods and services. Markets helps us create a
system and organize interactions of household and firms. These interactions are
somewhat guided by an “invisible hand” that leads them to desirable economic outcomes.
 7. Governments can sometimes improve economic outcomes – government is an established
institution that helps govern the laws that is implemented made by the system of
interactions in the market. They intervene in the economy to promote efficiency or
equality. And promote welfare within the individuals in the society.

How the economy works as a whole

The decisions and interactions that we make constitutes a greater whole, the economy.

8. A country’s standard of living depends on its ability to produce goods and services –
growth rate of a nation’s productivity correlates to growth rate of average income.
Having a higher productivity indicates that the economy of a country is doing well. That
is why government of various countries always aim for a higher GDP, To boost standards
of living, policy makers need to raise productivity by ensuring workers are well educated,
have the best tools to produce goods and services, and access to the best available
technology.

9. Prices rise when the government prints too much money – inflation, the increase in the
overall prices in the economy, is often due to the growth in quantity of money. High
inflation imposes various costs on society. In the long run, inflation is almost always
caused by excessive growth in the quantity of money, which causes the value of money to
fall.

10. Society faces a short run trade-off between inflation and unemployment – increasing the
amount of money in the economy stimulates the overall level of spending and thus the
demand for goods and services. Higher demand may over time cause firms to raise their
prices, but in the meantime, it also encourages them to hire more workers and produce a
larger quantity of goods and services. More hiring means more unemployment.

One of the things I always remembered upon studying economics are the concepts of supply and
demand. The allocation of resources in the market system is determined by the market forces of
supply and demand. There is a need to grasp the concept of supply and demand to better
understand how resources are allocated.
Law of Supply and Demand
The law of supply and demand can be observed in our daily lives. It describes the way in which,
all else being equal, the higher the price of a good, the more producers will supply that good or
the less people will demand that good and vice versa. In other words, the higher the price, the
lower the quantity demanded and the higher the quantity supplied.
The demand schedule reflects the law of demand, it is a downward sloping function and is a
schedule of the quantity. Supply schedule are the quantities supplied at each and every price.
Demand and supply curves are simply graphs of demand and supply schedules.