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Decision-making process - Assignment

   

Added on  2021-04-21

6 Pages1183 Words38 Views
Page 1 of 6ASSESSMENT ITEM 1

Page 2 of 6Table of contentsQuestion 1..................................................................................................................................3Question 2..................................................................................................................................3Reference....................................................................................................................................6

Page 3 of 6Question 1Answer-People are rational- This phrase is concerned with the decision-making process of thepeople under economic systems. According to this idea, people always make the mostsensible choice which provides them the most benefit out of all the choices available.According to Bauer (2018), this is used as assumptions in almost all of the theories ofeconomics in order to include the decision-making pattern of the people under study. Forexample, if a person is given a choice between lottery tickets of 1 million dollars with a 70%chance of winning and a lottery ticket of 1 billion dollars with a .05% chance of winning, itwill be rational for the individual to choose the former one. This is due to the fact that, thechance of getting 1 million dollars is more than that of the chance for getting 1 billion dollarchoosing which could not have made sense.People respond to economic incentives- This idea states that, as people tend to take decisionrationally, incentives or extra benefits influence the choices of the individuals in theeconomy. The incentives and the subsequent actions from the side of the individuals of theeconomy play a great role in the study of economics. Nicholson & Snyder (2014) stated thatthe impact of incentives on the behaviors of different individuals of the market is also studiedin order to understand the behaviors of the individuals as well. For example, when the priceof coffee goes up, consumer of the market will demand more of tea as tea is cheaper. In themeantime the seller of coffee will employ more labor as selling coffee in the market is nowbeneficial for the seller. Therefore all these economic entities respond to the change in theprice of one product which is very important for the study of economic entities.Optimal decisions are made at the margin- This principle of economics depicts thedecision-making process of the entities of the economies. As per the idea, people tend tomake the decision based on the marginal cost and the benefits analysis of any action. Thatmeans whether a factory owner will recruit another labor will depend on the marginalcontribution of the labor to the production process and the marginal cost associated with it.Karlan (2017) pointed out that, decisions are taken at the margin when the marginal benefitsof taking any actions are more than that of its marginal cost.

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