Unit 4: How People Make Economic Decisions

     The individual economic behavior have some principles - similarities we find in all people. Understanding these principles will be used to understand how individual behavior works itself thus leading to understanding the economy as a whole since economy is the result of the behavior of these individuals together.

     People make decisions in the following ways: making choices or exchanges, by choosing something or other things. For example, we all want a less polluted planet. That is, on one side, a cleaner, healthier planet. But for this there is other side of reality: increased price of production, selling, or both because of the need of skilled labor, new equipment. That is, on one side there is a better planet with more expensive prices, and on the other side – cheaper products in a more polluted world.

    Sustainability. It is not sustainable to destroy the world in pursuit of profit as well as an activity is not sustainable without generating enough profits to the economic needs of the individuals and businesses. 

    The need to choose is directly related to the issue of scarcity. (To better understand watch the video “The Scarcity and PPC”.) To make these choices employ another principle of decision making. Analyze opportunity cost. (For this), it measures the cost and benefit of each one of the alternatives. In this scenario you, for example, could give up portion of a price discount for the benefit of a better world. That is, you choose to pay 90 for something that could cost 80. In this case 80 was not intended part of the profit to sustainability issues. You have a cost for this – 10 in this example, to lose the opportunity to buy a cheaper product – 10 money units less. This is called the opportunity cost. To understand better, watch the video “The Opportunity cost” or don’t. And this will be your opportunity cost by choosing another video.

    Returning to our example of sustainability. So, let’s imagine that you opted for a more sustainable decision for the sake of the planet. Now assume the opportunity cost of this option.

    The next principle of decision making is the reality –“Think at the margin”. Let’s imagine polluting equipment such as a fuming tractor. It’s very unlikely that a change can occur to a tractor  that is not  polluting. The changes usually occur through small adjustments to the previously existing situation. Each one of these minor changes is called marginal change. For a change to occur, another principle can arise – encouraging the action. For example, charging a higher rate for older polluting vehicles creates incentive to the acquisition of a new and less polluting vehicle.