Decision Making
That economics has become one of the determining decision-making principles is difficult to deny. Thousands of individuals and businesses are being governed by economic principles and view economics as the determining factor of individual decision-making. In microeconomics, individual decision-making is usually defined via the four basic principles. Generally, individuals who seek to take economic and non-economic decisions should be prepared to evaluate marginal costs and benefits of their decisions. It essential that in their decision making efforts, individuals are able to balance marginal costs with marginal benefits and to take into account the incentives that may change the quality of their decisions.
The four principles of individual decision-making
According to Mankiw (1998), the behavior of an economy always reflects the behavior of the individuals who make up this economy, and the four principles of decision making lay the foundation for understanding the basic microeconomic processes. First, people face tradeoffs (Mankiw, 1998), meaning that to get one thing individuals have to give up something else. That, however, does not mean that individuals should reject their decisions on the premise that these decisions incur additional losses or costs. The second decision-making principle rules that the cost of something is what you give up to get it (Mankiw, 1998). Taking into account that decision-making and tradeoffs are inseparable, individuals are expected to compare the costs and benefits of alternative solutions or courses of action (Mankiw, 1998). The third decision making principle implies that rational people think at the margin (Mankiw, 1998). In other words, the majority of life decisions involve small incremental adjustments (or marginal changes) to the existing action and plan, and thinking at the margin often becomes the best way of taking decisions (Mankiw, 1998). Finally, according to Mankiw (1998), people always respond to incentives. Thus, even if people take decisions by comparing costs and benefits, these decisions are subject to changes as soon as either costs or benefits (or both) of each particular decision change, too.
Decision making marginal benefits and marginal costs
When still at school, I faced a serious dilemma one of my best friends left to another school and afraid of losing my friend, I had to consider a possibility of changing my school, too. Without any knowledge of economics, I had to weigh all costs and benefits of my decision. Friendship was the major marginal benefit I was likely to obtain if I decided in favor of leaving my school. However, the time spent on traveling and the quality of education there were the two most serious marginal costs. Taking into account all those factors I decided that I would continue my studies in my school and would try to keep in touch with my friend. Certainly, I would have left the school under the impact of certain incentives for example, if the new school had been not far from my house or if the new school could have offered better quality of education. Such incentives would have changed the balance of marginal costs and benefits and would have certainly given me a chance to stay in touch with my friend.
Now I can see that economic principles produce significant effects on the quality of our decision making. First, we often view ourselves as consumers of various goods and services, and economics helps us allocate our limited resources to satisfy our unlimited desires (McCarthy Schafermeyer, 2004). Second, economic principles help us mediate the influence of numerous factors on our decisions, including the media, news, advertising, etc. needless to say, decision-making today is much more complex than it used to be several decades ago (Hafstrom, 1992), and economic principles work to create a logical order of those influences and to help us choose the most relevant and justified decision. Finally, the four economic principles as discussed by Mankiw (1998) are applicable in all spheres of individual decision-making that are not necessarily related to economics consumers operate in an imperfect world in which they do not maximize their decisions in terms of economic considerations, such a price-quantity relationships, marginal utility, or indifference curves (Schiffman Kanuk, 2004), but individuals are always impacted by the marginal losses and benefits they are bound to carry as a result of their decisions. Economic principles readily explain the basics and norms of economic interactions in the modern world, and the effectiveness of the whole economy largely depends on how good we are in our decision-making efforts.
Conclusion
In his book, Mankiw (1998) discusses the four basic principles of individual decision-making. These principles are readily applicable in all spheres of personal decision-making and confirm the impact, which economics produces on the quality of our decisions. Economic principles help us weigh the costs and benefits of each particular decision and to evaluate various factors that change the direction of our decision-making. In many aspects, the overall efficiency of economic interactions largely depends on how good we are in our decision-making efforts.