How Do people make economic decisions

The purpose of this paper is to evaluate how decision-making affects the economy and people. It is obvious that free markets perform much better than communist markets. The decision making principals, according to this there are four decision making principals. In the first principal people will trade off, they will give something up for another thing they want. Making decisions means people will have to trade one goal for another. The second decision is giving up something when they already had one thing. People make trade off according to the economy.

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People have wants and needs therefore they need to choose carefully how to spend their income and resources. Choosing and item will benefit and cost, it will also mean that the person will not have the benefit of the item he or she gave up. Third the margin is thought of in this step. When considering the margin people will take into consideration the marginal benefit and only then if it exceeds the marginal cost. Last, people will react to incentives. People will react to price and benefits associated with their decision. My example of purchasing my first home was based on marginal cost and marginal benefit.

I was renting an apartment in California and rents seem to be going up because the economy going down. People were losing their homes due to foreclosure and had to live somewhere. House prices were going down and rents going up, there was no telling when they were going to stop. I did the math and figured my mortgage would be the same if not lower with some money down. The marginal cost would be greater up front in the form of cost associated with purchasing a home. However, my marginal benefit in the long term would be even greater.

Therefore, if rent was cheaper now, I would have to pay more the longer I stay in that apartment. The marginal benefit to purchasing a home would be the same for the following 30 years. The only incentive that would have led me to make a different decision is if they guaranteed my rent for the next 30 years. The economics related to the decision making and the working of the economy can be demonstrated by me purchasing a tool for my job. When I purchase tools I get the benefit of making money based on my ability to fix the customers gas turbines.

The economy benefits the store where I purchase the tool makes money. When I fix a gas turbine it allows the customer to pump and produce millions a dollars a day, and they sell the product and make money, in turn they sell the gas to customers which, get to work and make money. A market economy is a type of economic system in which the trading and exchange of goods, services and information takes place in a free market (Market Economy, 2010). These types of markets are governed by supply and demand. A centrally planned economy like Cuba and North Korea decision are made by the government.

Mixed economies rely in the state and the private sector to make decisions on the market economy and economic system. In a free market people purchase and sell services and goods. In this type of market people are free to interact. In a communist economy, such as Cuba and North Korea the government decides what needs to be produced and where to work. Decision can be based on marginal cost or marginal benefit; there is no doubt that they are a huge part of the consumer’s decisions to purchase goods. Whether it is the cost of buying a home or just a simple meal people will always weigh the cost of goods.