The process of making economic decisions is based on several principles. The principles define the circumstances under which the decisions take place and also the thought processes which guide persons as they engage in economic transactions. The most important principles include the need to make trade-offs: the existence of opportunity cost in decision making: rationality in decision making requires the use of the marginal effect and that economic principles significantly influence the process of decision making meaning that individuals commonly respond to the prevailing incentives whether positive or negative (Nelson, 2002, p3-5).
The trade-off is critical in the process of decision making in that a person has to give up something in order to gain the other. In essence, one cannot have all that is available. The presence of opportunity cost means that in the process of decision making, the individual is faced with the choice to forego some benefits in order to gain another. Indeed, this is what necessitates a decision. The opportunity cost is the value of what has to be foregone in order to gain the intended benefits.
The fact that rational people use the margin instead of gross means that it is the extra benefit or the extra cost, which matters. A comparison of the marginal cost and marginal benefit guides the economic decision as opposed to total cost and total benefit. Finally, the decision-making process is guided by economic principles. This implies that individuals always strive to make decisions that are economically plausible.
As mentioned above, economic decision making relies on a cost-benefit analysis. Where marginal costs outweigh marginal benefits, then the individual should decline, on the other hand, if the marginal benefits outweigh the marginal costs, then the decision is affirmative. I have been faced with numerous occasions. On one occasion, I had to choose between spending my money on a leisure trip organized by my college friends and buying a laptop computer for use in my school work. In the end, I opted to purchase the laptop instead of going for the trip.
The marginal benefits were several. If I bought the laptop, I had the chance to improve my academic performance in terms of better grades, which could mean a better job for me, thus a better future in the long-run. Going on the leisure trip meant that I could enjoy myself with my friends, relax and go back to school re-energized and better positioned to achieve good grades in the succeeding semester. Choosing the laptop meant that I had to forego these benefits.
One very important incentive which could have potentially reversed my decision could be the case where the trip was an educational tour with a significant impact on the understanding of the courses undertaken in pursuant to my degree. Indeed this fact could have significantly increased the benefits of going for the trip to levels above purchasing the laptop, especially bearing in mind the fact that the laptop could be bought at a later date.
The above-explained principles of economic decision making are the driving force behind the interactions as well as the working of the entire economy. All decisions are seen as favorable or unfavorable based on their ability to fulfill the principles. People decide based on what they deem fit for them; thus, the entire economy depends on the consumption, savings, investments, and other economic decisions made by individuals in furtherance of their own assessments.
Nelson, T., (2002). Ten Principles Of Economics. Web.