In today’s economy, decision-making skills vary for each household; however, the bottom-line goal for every individual is to get the most for their money. In order to do this, there are 4 principles of individual decision-making: facing trade-offs, evaluating what one is giving up to obtain their goal, thinking at the margin, and responding to incentives.
The first principle in individual decision-making is facing a trade-off. In order for individuals to accomplish their goals or to obtain something they desire, there is usually something that must be given up or traded to accomplish that. In Chapter 1 Principles of Economics, efficiency vs. equity is discussed which helps further explain this principle. Society is always desiring to obtain the most for their money; getting the best they can. This is called efficiency. While trying to get the most out of our everyday decisions, we must also consider equity and making sure that the economic prosperity of our decisions is fairly distributed.
The second principle goes hand-in-hand with the first. “Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action” (Mankiw, 2007, p.5). To make the decision of what goals we are going to strive for, it is imperative to consider if the goal is worth the item(s) being given up. Is it worth not being able to do something else? How much money is it going to cost to obtain this goal or item? How much of my personal time is needed to accomplish this goal? These are all questions that must be asked and evaluated prior to making economic decisions.
The third principle of individual economic decision-making relates to marginal decision-making. Rational people will think at the marginal level, making small changes or tweaks in their plans to achieve the desired objective. Rational people normally have a certain system or method he/she uses to achieve their objective and they understand that sometimes small...