How People Make Economic Decisions
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Individual decision making contains four economic principles. The first norm shows a perception of the customer’s need for the product. Since the resources are limited, the society should decide how to use and distribute them among the consumers. Therefore, one usually has give up one thing in order to get the other one. The shortage of the economic services and goods forces people to make tradeoffs. The second principle points out that the consumers must calculate the true cost of the items mentioning less-than-tangible costs. Hence, a decision requires the comparison of the benefits and the costs related to the alternative courses of the purchase or action. The third footing underlines that a person can make a better choice through thinking at the margin than without it. Moreover, a rational decision-maker acts only, when the marginal cost is under the marginal benefit of the action. The last one explains that the retailers frequently use the marketing tools to influence consumer’s behavior of spending money. That is why the buyers can save money till the next sale or spend them now (Mankiw, 2001).
Buying a town house must be the carefully weighed decision, because of the different financial results. New home requires the long-term servicing, the exterior and interior care. Thus, it will be more expensive over a long period. The owner will be also obliged to give up his efforts and time for its maintenance. However, it provides the comfortable and enjoyable environment, in addition to stability for the future. The strength of the economy seriously influences the marginal benefits and the marginal costs of the purchase. It determines the interest rate at the purchase on credit, as well as affects the market price. The taxing body can also lead one to make the different decision by the tax incentives and the taxes that are needed to pay. The tax deductions depress the demand for purchase, as it reduces its benefits. The government spending on new infrastructures attracts the buyers and encourages the economic growth.
The principles of economics immediately refer to the decision of buying the house: facing trade off to rent or to buy, analyzing the true cost, incentives and rational thinking. It is the choice of what is better – to buy a new house or to rent an apartment. The economy’s situation is a favorable during the economic growth, as the marginal benefits go above the marginal costs. The time of recession has directly opposite consequences. Thus, the economy must be strong enough in order to allow this purchase.
A market economy is an economic system, where the economic resources are allocated by the decisions of the firms and households. The exchange, as well as the trade of information, services, and goods, takes place in a free market. The market determines the price of the services and goods by itself. It is ruled only by the law of supply and demand. The centrally planned economy is the opposite system, in which the government chooses the types, the price and the quantity of the products. In general, the consumers do not decide what they need or want. Thus, the government has the full control of the market. The mixed economy combines the market self-regulation and the government control. It is driven by the decisions of the sellers and buyers, but the government has a regulatory function. In fact, not any country works as the free market, as the government has some level of control at all times. Nevertheless, the market economy is defined as the one with the lowest level of the government intervention, while the mixed economy comprises the features of socialism and capitalism (Mankiw, 2001).
In this case, the U.S. economic system is the market economy that follows the principles of individual freedom. Though, the government has a limited role in the economic decision making in the market economy. Thus, the U.S. economy is not a pure market one, as the government plays a respective role. It encourages the production and consumption of the certain types of goods and services by assistance programs and incentives in order to provide the efficient economy. It also sets the course of action that regulates the environmental protection, the working conditions and the consumer products. The policy decisions influence the business and the whole economy.